10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to         

Commission file number: 001-33437

KKR FINANCIAL HOLDINGS LLC

(Exact name of registrant as specified in its charter)

Delaware	11-3801844
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

555 California Street, 50th Floor San Francisco, CA	94104
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (415) 315-3620

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes  x No

The number of shares of the registrant’s common shares outstanding as of October 30, 2013 was 204,824,159.

TABLE OF CONTENTS

		Page
Part I.
FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	93
Item 4.	Controls and Procedures	93
Part II.
OTHER INFORMATION
Item 1.	Legal Proceedings	94
Item 1A.	Risk Factors	94
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	94
Item 3.	Defaults Upon Senior Securities	94
Item 4.	Mine Safety Disclosure	94
Item 5.	Other Information	94
Item 6.	Exhibits	94

2

PART I.    FINANCIAL INFORMATION

Item 1. Financial Statements

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands, except share information)

	September 30, 2013			December 31, 2012
Assets
Cash and cash equivalents	$	221,986		$	237,606
Restricted cash and cash equivalents	509,688			896,396
Securities	519,675			533,520
Corporate loans, net (includes $156,595 and $35,879 measured at estimated fair value and $312,312 and $128,289 loans held for sale as of September 30, 2013 and December 31, 2012, respectively)	6,153,072			5,947,857
Equity investments, at estimated fair value ($5,319 and $7,187 pledged as collateral as of September 30, 2013 and December 31, 2012, respectively)	191,153			161,621
Oil and gas properties, net	372,034			289,929
Derivative assets	35,348			23,207
Interest and principal receivable	38,586			46,960
Other assets	430,449			221,783
Total assets	$	8,471,991		$	8,358,879
Liabilities
Collateralized loan obligation secured notes	$	4,903,438		$	5,122,338
Collateralized loan obligation junior secured notes to affiliates	193,921			296,557
Credit facilities	48,489			107,789
Convertible senior notes	—			166,028
Senior notes	362,251			362,178
Junior subordinated notes	283,517			283,517
Accounts payable, accrued expenses and other liabilities	74,737			25,931
Accrued interest payable	16,497			20,519
Accrued interest payable to affiliates	4,134			6,632
Related party payable	3,847			10,998
Derivative liabilities	86,108			117,270
Total liabilities	5,976,939			6,519,757
Shareholders’ equity
Preferred shares, no par value, 50,000,000 shares authorized and 14,950,000 and zero issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	—			—
Common shares, no par value, 500,000,000 shares authorized, and 204,824,159 and 178,437,078 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	—			—
Paid-in-capital	3,313,400			2,762,584
Accumulated other comprehensive loss	(29,693		)	(70,226		)
Accumulated deficit	(788,655		)	(853,236		)
Total shareholders’ equity	2,495,052			1,839,122
Total liabilities and shareholders’ equity	$	8,471,991		$	8,358,879

See notes to condensed consolidated financial statements.

3

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except per share information)

	For the three months ended September 30, 2013			For the three months ended September 30, 2012			For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Revenues
Loan interest income	$	82,541		$	101,988		$	272,919		$	313,684
Securities interest income	10,933			18,791			39,326			62,180
Oil and gas revenue	32,446			21,487			84,118			44,262
Other	2,782			1,068			10,033			1,692
Total revenues	128,702			143,334			406,396			421,818
Investment costs and expenses
Interest expense	39,767			40,418			118,366			123,788
Interest expense to affiliates	6,839			12,954			26,485			38,131
Provision for loan losses	9,339			—			20,407			46,498
Oil and gas production costs	9,163			9,803			26,420			19,041
Oil and gas depreciation, depletion and amortization	11,806			7,011			29,910			14,867
Other	963			714			2,531			3,482
Total investment costs and expenses	77,877			70,900			224,119			245,807
Other income
Net realized and unrealized gain on investments	5,673			75,774			125,397			160,788
Net realized and unrealized loss on derivatives and foreign exchange	(3,062		)	(8,102		)	(5,012		)	(2,583		)
Net loss on restructuring and extinguishment of debt	—			—			(20,269		)	(445		)
Other income	3,615			5,371			17,565			10,664
Total other income	6,226			73,043			117,681			168,424
Other expenses
Related party management compensation	10,920			26,602			56,744			57,519
General, administrative and directors expenses	4,654			5,464			13,138			14,913
Professional services	1,573			1,130			5,288			4,334
Total other expenses	17,147			33,196			75,170			76,766
Income before income taxes	39,904			112,281			224,788			267,669
Income tax expense (benefit)	18			317			434			(3,548		)
Net income	$	39,886		$	111,964		$	224,354		$	271,217
Preferred share distributions	6,891			—			20,520			—
Net income available to common shareholders	$	32,995		$	111,964		$	203,834		$	271,217
Net income per common share:
Basic	$	0.16		$	0.63		$	1.01		$	1.52
Diluted	$	0.16		$	0.61		$	1.01		$	1.48
Weighted-average number of common shares outstanding:
Basic	204,134			177,862			201,824			177,815
Diluted	204,134			183,431			201,824			182,440
Distributions declared per common share	$	0.21		$	0.21		$	0.68		$	0.65

See notes to condensed consolidated financial statements.

4

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)

	For the three months ended September 30, 2013		For the three months ended September 30, 2012			For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Net income	$	39,886	$	111,964		$	224,354	$	271,217
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale	3,137		(24,572		)	2,322		(34,399		)
Unrealized gains on cash flow hedges	6,813		2,767			38,211		1,580
Total other comprehensive income (loss)	9,950		(21,805		)	40,533		(32,819		)
Comprehensive income	$	49,836	$	90,159		$	264,887	$	238,398

See notes to condensed consolidated financial statements.

5

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(Amounts in thousands)

									Accumulated
	Preferred Shares			Common Shares					Other						Total
	Shares	Paid-In Capital		Shares		Paid-In Capital			Comprehensive Loss			Accumulated Deficit			Shareholders’ Equity
Balance at January 1, 2013	—	$	—	178,437		$	2,762,584		$	(70,226	)	$	(853,236	)	$	1,839,122
Net income	—	—		—		—			—			224,354			224,354
Other comprehensive income	—	—		—		—			40,533			—			40,533
Distributions declared on preferred shares	—	—		—		—			—			(20,520		)	(20,520		)
Distributions declared on common shares	—	—		—		—			—			(139,253		)	(139,253		)
Grant of restricted common shares	—	—		331		—			—			—			—
Issuance of common shares	—	—		30		321			—			—			321
Repurchase and cancellation of common shares	—	—		(25	)	(223		)	—			—			(223		)
Issuance of common shares in exchange for convertible notes	—	—		26,051		186,254			—			—			186,254
Issuance of preferred shares	14,950	361,622		—		—			—			—			361,622
Share-based compensation expense related to restricted common shares	—	—		—		2,842			—			—			2,842
Balance at September 30, 2013	14,950	$	361,622	204,824		$	2,951,778		$	(29,693	)	$	(788,655	)	$	2,495,052

See notes to condensed consolidated financial statements.

6

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

	For the nine monthsended September 30, 2013			For the nine months ended September 30, 2012
Cash flows from operating activities
Net income	$	224,354		$	271,217
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized and unrealized loss on derivatives and foreign exchange	5,012			2,583
Net loss on restructuring and extinguishment of debt	20,269			445
Write-off of debt issuance costs	6,014			1,381
Lower of cost or estimated fair value adjustment on corporate loans held for sale	11,442			(1,294		)
Provision for loan losses	20,407			46,498
Impairment charges	17,496			12,067
Share-based compensation	2,842			2,258
Net realized and unrealized gain on residential mortgage-backed securities, at estimated fair value	(9,748		)	(9,687		)
Net realized and unrealized gain on investments	(144,587		)	(161,874		)
Depreciation and net amortization	(2,771		)	(44,018		)
Changes in assets and liabilities:
Interest receivable	4,960			12,249
Other assets	(33,574		)	(17,997		)
Related party payable	(7,151		)	10,674
Accounts payable, accrued expenses and other liabilities	(5,113		)	6,400
Accrued interest payable	(4,022		)	(7,447		)
Accrued interest payable to affiliates	(2,498		)	295
Net cash provided by operating activities	103,332			123,750
Cash flows from investing activities
Principal payments from corporate loans	1,243,853			1,462,505
Principal payments from securities available-for-sale and other securities, at estimated fair value	101,807			59,078
Principal payments from residential mortgage-backed securities, at estimated fair value	11,737			5,875
Proceeds from sales of corporate loans	210,280			304,946
Proceeds from sales of securities available-for-sale and other securities, at estimated fair value	30,584			448,165
Proceeds from equity and other investments	98,621			15,290
Proceeds from securities sold, not yet purchased	4,218			26,792
Purchases of corporate loans	(1,555,087		)	(1,095,851		)
Purchases of securities available-for-sale and other securities, at estimated fair value	(115,959		)	(95,008		)
Purchases of equity and other investments	(344,018		)	(283,751		)
Cover securities sold, not yet purchased	(2,928		)	(8,222		)
Net change in proceeds, purchases, and settlements of derivatives	(7,856		)	(7,150		)
Net change in restricted cash and cash equivalents	386,708			(335,479		)
Net cash provided by investing activities	61,960			497,190
Cash flows from financing activities
Issuance of collateralized loan obligation secured notes	449,002			92,607
Retirement of collateralized loan obligation secured notes	(774,302		)	(702,789		)
Proceeds from credit facilities	2,400			69,489
Repayment of credit facilities	(61,700		)	—
Repayment of convertible senior notes	—			(135,531		)
Net proceeds from senior notes	—			111,418
Net proceeds from issuance of preferred shares	361,622			—
Distributions on common shares	(139,253		)	(115,967		)
Distributions on preferred shares	(13,629		)	—
Repurchase and cancellation of common shares	—			(96		)
Other capitalized costs	(5,052		)	(859		)
Net cash used in financing activities	(180,912		)	(681,728		)
Net decrease in cash and cash equivalents	(15,620		)	(60,788		)
Cash and cash equivalents at beginning of period	237,606			392,154
Cash and cash equivalents at end of period	$	221,986		$	331,366
Supplemental cash flow information
Cash paid for interest	$	121,170		$	143,882
Net cash paid for income taxes	$	7,618		$	106
Non-cash investing and financing activities
Issuance of restricted common shares	$	3,282		$	2,849
Loans transferred from held for investment to held for sale	$	316,003		$	86,969
Loans transferred from held for sale to held for investment	$	—		$	114,871
Preferred share distributions declared, not yet paid	$	6,891		$	—
Conversion of convertible senior notes to common shares	$	186,254		$	—

See notes to condensed consolidated financial statements.

7

KKR FINANCIAL HOLDINGS LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION

KKR Financial Holdings LLC together with its subsidiaries (the “Company”) 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 its 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.

KKR Financial Advisors LLC (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”).

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of the Company and entities established to complete secured financing transactions that are considered to be variable interest entities (“VIEs”) and for which the Company is the primary beneficiary.

Certain prior period information has been reclassified to conform to the current year presentation to provide additional detailed information related to the Company’s oil and gas costs as a result of the growth in the Company’s oil and gas business. These costs were previously included in general, administrative and directors expenses.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from management’s estimates.

The Company uses historical experience and various other assumptions and information that are believed to be reasonable under the circumstances in developing its estimates and judgments. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. While the Company believes that the estimates and assumptions used in the preparation of the condensed consolidated financial statements are appropriate, actual results could differ from those estimates.

Estimates of oil, natural gas and natural gas liquid (“NGL”) reserves and their values, future production rates and future costs and expenses are inherently uncertain, including many factors beyond the Company’s control. Reservoir engineering is a subjective process of estimating underground accumulations of oil, natural gas and NGL that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions and the judgments of the individuals preparing the estimates. In addition, reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of oil, natural gas and NGL eventually recovered, and could materially affect the Company’s future depreciation, depletion and amortization expense (“DD&A”), its asset retirement obligations or impairment considerations.

8

Consolidation

KKR Financial CLO 2005-1, Ltd. (“CLO 2005-1”), KKR Financial CLO 2005-2, Ltd. (“CLO 2005-2”), KKR Financial CLO 2006-1, Ltd. (“CLO 2006-1”), KKR Financial CLO 2007-1, Ltd. (“CLO 2007-1”), KKR Financial CLO 2007-A, Ltd. (“CLO 2007-A”), KKR Financial CLO 2011-1, Ltd. (“CLO 2011-1”), KKR Financial CLO 2012-1, Ltd. (“CLO 2012-1”), and KKR Financial CLO 2013-1, Ltd. (“CLO 2013-1”) (collectively the “Cash Flow CLOs”) are entities established to complete secured financing transactions. These entities are VIEs which the Company consolidates as the Company has determined it has the power to direct the activities that most significantly impact these entities’ economic performance and the Company has both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities. In CLO transactions, subordinated notes have the first risk of loss and conversely, the residual value upside of the transactions.

The Company finances the majority of its corporate debt investments through its CLOs. As of September 30, 2013, the Company’s eight CLOs held $6.5 billion par amount, or $6.2 billion estimated fair value, of corporate debt investments. As of December 31, 2012, the Company had seven CLOs that held $6.3 billion par amount, or $6.0 billion estimated fair value, of corporate debt investments. The assets in each CLO can be used only to settle the debt of the related CLO. As of September 30, 2013, the aggregate CLO debt totaled $4.9 billion of secured debt outstanding held by unaffiliated third parties and $193.9 million of junior secured notes outstanding held by an affiliate of the Manager.

The Company consolidates all non-VIEs in which it holds a greater than 50 percent voting interest.

In addition, the Company has non-controlling interests in joint ventures and partnerships that do not qualify as VIEs and do not meet the control requirements for consolidation as defined by GAAP.

All inter-company balances and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:

Level 1:  Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets generally included in this category are equity securities listed in active markets.

Level 2:  Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value and certain financial instruments classified as derivatives.

Level 3:  Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value, residential mortgage-backed securities (“RMBS”), certain interests in joint ventures and partnerships and certain financial instruments classified as derivatives.

A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

9

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which the Company recognizes at the end of the reporting period.

Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that the Company and others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, the Company does not require that fair value always be a predetermined point in the bid-ask range. The Company’s policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets the Company’s best estimate of fair value.

Depending on the relative liquidity in the markets for certain assets, the Company may transfer assets to Level 3 if it determines that observable quoted prices, obtained directly or indirectly, are not available. The valuation techniques used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.

Securities and Corporate Loans, at Estimated Fair Value:  Securities and corporate loans, at estimated fair value are initially valued at transaction price and are subsequently valued using market data for similar instruments (e.g., recent transactions or broker quotes), comparisons to benchmark derivative indices or valuation models. Valuation models are based on yield analysis techniques, where the key inputs are based on relative value analyses, which incorporate similar instruments from similar issuers. In addition, an illiquidity discount is applied where appropriate.

Equity Investments, at Estimated Fair Value:  Equity investments, at estimated fair value, are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on market and income (discounted cash flow) approaches, in which various internal and external factors are considered. Factors include key financial inputs and recent public and private transactions for comparable investments. Key inputs used for the discounted cash flow approach include the weighted average cost of capital and assumed inputs used to calculate terminal values, such as earnings before interest, taxes, depreciation and amortization (“EBIDTA”) exit multiples. The fair value recorded for a particular investment will generally be within the range suggested by the two approaches. Upon completion of the valuations conducted, an illiquidity discount is applied where appropriate.

Interests in Joint Ventures and Partnerships:  Interests in joint ventures and partnerships include certain equity investments related to the oil and gas and commercial real estate sectors. Interests in joint ventures and partnerships are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on an income (discounted cash flow) approach, in which various internal and external factors are considered and key inputs include the weighted average cost of capital. In addition, an illiquidity discount is applied where appropriate.

Over-the-counter (“OTC”) Derivative Contracts:  OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit standing of reference entities, and equity prices. OTC derivatives are initially valued using quoted market prices, if available, or models using a series of techniques, including closed-form analytic formulae, such as the Black-Scholes option-pricing model, and/or simulation models in the absence of quoted market prices. Many pricing models employ methodologies that have pricing inputs observed from actively quoted markets, as is the case for generic interest rate swap and option contracts.

Residential Mortgage-Backed Securities, at Estimated Fair Value:  RMBS are initially valued at transaction price and are subsequently valued using a third party valuation servicer. The most significant inputs to the valuation of these instruments are default and loss expectations and constant prepayment rates.

10

Key unobservable inputs that have a significant impact on the Company’s Level 3 valuations as described above are included in Note 13 to these condensed consolidated financial statements. The Company utilizes several unobservable pricing inputs and assumptions in determining the fair value of its Level 3 investments. These unobservable pricing inputs and assumptions may differ by asset and in the application of the Company’s valuation methodologies. The reported fair value estimates could vary materially if the Company had chosen to incorporate different unobservable pricing inputs and other assumptions or, for applicable investments, if the Company only used either the discounted cash flow methodology or the market comparables methodology instead of assigning a weighting to both methodologies.

Valuation Process

The valuation process involved in Level 3 measurements for assets and liabilities is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The Company utilizes a valuation committee, whose members consist of the Company’s Chief Executive Officer, Chief Financial Officer, General Counsel and certain other employees of the Manager. The valuation committee is responsible for coordinating and implementing the Company’s quarterly valuation process. For assets classified as Level 3, the investment professionals are responsible for documenting preliminary valuations based on various factors including their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and model projections discussed above. The Company engages an independent valuation firm to opine on its internal valuation assessments for certain holdings over a specific dollar threshold. All valuations are approved by the valuation committee.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash held in banks and highly liquid investments with original maturities of three months or less. Interest income earned on cash and cash equivalents is recorded in other within total revenues on the condensed consolidated statements of operations.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents represent amounts that are held by third parties under certain of the Company’s financing and derivative transactions. Interest income earned on restricted cash and cash equivalents is recorded in other within total revenues on the condensed consolidated statements of operations.

On the condensed consolidated statement of cash flows, net additions or reductions to restricted cash and cash equivalents are classified as an investing activity as restricted cash and cash equivalents reflect the receipts from collections or sales of investments, as well as payments made to acquire investments held by third parties.

Securities

Securities Available-for-Sale

The Company classifies its investments in securities as available-for-sale as the Company may sell them prior to maturity and does not hold them principally for the purpose of selling them in the near term. These investments are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive loss. Estimated fair values are based on quoted market prices, when available, on estimates provided by independent pricing sources or dealers who make markets in such securities, or internal valuation models when external sources of fair value are not available. Upon the sale of a security, the realized net gain or loss is computed on a weighted average cost basis. Purchases and sales of securities are recorded on the trade date.

The Company monitors its available-for-sale securities portfolio for impairments. A loss is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. The Company considers many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost and the severity of the decline, the amount of the unrealized loss, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. In addition, for debt securities, the Company considers its intent to sell the debt security, the Company’s estimation of whether or not it expects to recover the debt security’s entire amortized cost if it intends to hold the debt security, and whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery. For equity securities, the Company also considers its intent and ability to hold the equity security for a period of time sufficient for a recovery in value.

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The amount of the loss that is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary is dependent on certain factors. If the security is an equity security or if the security is a debt security that the Company intends to sell or estimates that it is more likely than not that the Company will be required to sell before recovery of its amortized cost, then the impairment amount recognized in earnings is the entire difference between the estimated fair value of the security and its amortized cost. For debt securities that the Company does not intend to sell or estimates that it is not more likely than not to be required to sell before recovery, the impairment is separated into the estimated amount relating to credit loss and the estimated amount relating to all other factors. Only the estimated credit loss amount is recognized in earnings, with the remainder of the loss amount recognized in accumulated other comprehensive loss.

Unamortized premiums and unaccreted discounts on securities available-for-sale are recognized in interest income over the contractual life, adjusted for actual prepayments, of the securities using the effective interest method.

Other Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain securities for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these securities. Other securities, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Residential Mortgage-Backed Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for its residential mortgage investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of its residential mortgage investments. RMBS, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Equity Investments, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain marketable equity securities and private equity investments. The Company elects the fair value option of accounting for private equity investments received through restructuring debt transactions or issued by an entity in which the Company may have significant influence. The Company elected the fair value option for certain equity investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these equity investments. Equity investments, at fair value, are managed based on overall value and potential returns. These equity investments carried at estimated fair value are presented separately on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Interests in Joint Ventures and Partnerships

The Company has elected the fair value option of accounting for certain non-controlling interests in joint ventures and partnerships, for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these interests. These interests in joint ventures and partnerships are presented within other assets on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased consist of equity and debt securities that the Company has sold short. In order to facilitate a short sale, the Company borrows the securities from another party and delivers the securities to the buyer. The Company will be required to “cover” its short sale in the future through the purchase of the security in the market at the prevailing market price and deliver it to the counterparty from which it borrowed. The Company is exposed to a loss to the extent that the security price increases during the time from when the Company borrowed the security to when the Company purchases it in the market to cover the short sale. Securities sold, not yet purchased are presented within accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets with gains and losses reported in net realized and unrealized gains on investments on the condensed consolidated statement of operations.

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Corporate Loans, Net

Corporate Loans

Corporate loans are generally held for investment and the Company initially records loans at their purchase prices. The Company subsequently accounts for loans based on their outstanding principal plus or minus unaccreted purchase discounts and unamortized purchase premiums. Corporate loans that the Company transfers to held for sale are transferred at the lower of cost or estimated fair value.

Interest income on loans includes interest at stated coupon rates adjusted for accretion of purchase discounts and the amortization of purchase premiums. Unamortized premiums and unaccreted discounts are recognized in interest income over the contractual life, adjusted for actual prepayments, of the loans using the effective interest method.

Other than loans which are measured at fair value, loans acquired with deteriorated credit quality are recorded at initial cost and interest income is recognized as the difference between the Company’s estimate of all cash flows that it will receive from the loan in excess of its initial investment on a level-yield basis over the life of the loan (accretable yield) using the effective interest method.

A loan is typically placed on non-accrual status at such time as: (i) management believes that scheduled debt service payments may not be paid when contractually due; (ii) the loan becomes 90 days delinquent; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the collateral securing the loan decreases below the Company’s carrying value of such loan. As such, loans placed on non-accrual status may or may not be contractually past due at the time of such determination. While on non-accrual status, previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using the cost-recovery method, cash-basis method or some combination of the two methods. A loan is placed back on accrual status when the ultimate collectability of the principal and interest is not in doubt.

The Company may modify corporate loans in transactions where the borrower is experiencing financial difficulty and a concession is granted to the borrower as part of the modification. These concessions may include one or a combination of the following: a reduction of the stated interest rate; payment extensions; forgiveness of principal; or an exchange of assets. Such modifications typically qualify as troubled debt restructurings (“TDRs”). In order to determine whether the borrower is experiencing financial difficulty, an evaluation is performed including the following considerations: whether the borrower is or will be in payment default on any of his or her debt in the foreseeable future without the modification; whether there is a potential for a bankruptcy filing; whether there is a going-concern issue; or whether the borrower is unable to secure financing elsewhere. The Company may also identify receivables that are newly considered impaired and discloses the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired.

Loans whose terms have been modified in a TDR are considered impaired, unless accounted for at fair value or the lower of cost or estimated fair value, and are typically placed on non-accrual status, but can be moved to accrual status when, among other criteria, payment in full of all amounts due under the restructured terms is expected and the borrower has demonstrated a sustained period of repayment performance, typically six months.

TDRs are separately identified for impairment disclosures and are measured at either the fair market value or the present value of estimated future cash flows using the respective loan’s effective rate at inception. Impairments associated with TDRs are included within the allocated component of the Company’s allowance for loan losses.

In addition, the Company may also modify corporate loans which usually involve changes in existing interest rates combined with changes of existing maturities to prevailing market rates/maturities for similar instruments at the time of modification. Such modifications typically do not meet the definition of a TDR since the respective borrowers are neither experiencing financial difficulty nor are seeking a concession as part of the modification.

The corporate loans the Company invests in are generally deemed in default upon the non-payment of a single interest payment or as a result of the violation of a covenant in the respective loan agreement. The Company charges-off a portion or all of its amortized cost basis in a corporate loan when it determines that it is uncollectible due to either: (i) the estimation based on a recovery value analysis of a defaulted loan that less than the amortized cost amount will be recovered through the agreed upon restructuring of the loan or as a result of a bankruptcy process of the issuer of the loan; or (ii) the determination by the Company to transfer a loan to held for sale with the loan having an estimated market value below the amortized cost basis of the loan.

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Allowance for Loan Losses

The Company’s corporate loan portfolio is comprised of a single portfolio segment which includes one class of financing receivables, that is, high yield loans that are typically purchased via assignment or participation in either the primary or secondary market and are held primarily for investment. High yield loans are generally characterized as having below investment grade ratings or being unrated.

The Company’s allowance for loan losses represents its estimate of probable credit losses inherent in its corporate loan portfolio held for investment as of the balance sheet date. Estimating the Company’s allowance for loan losses involves a high degree of management judgment and is based upon a comprehensive review of the Company’s loan portfolio that is performed on a quarterly basis. The Company’s allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses pertains to specific loans that the Company has determined are impaired. The Company determines a loan is impaired when management estimates that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis the Company performs a comprehensive review of its entire loan portfolio and identifies certain loans that it has determined are impaired. Once a loan is identified as being impaired, the Company places the loan on non-accrual status, unless the loan is already on non-accrual status, and records an allowance that reflects management’s best estimate of the loss that the Company expects to recognize from the loan. The expected loss is estimated as being the difference between the Company’s current cost basis of the loan, including accrued interest receivable, and the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the loan’s observable estimated fair value may be used. The Company also estimates the probable credit losses inherent in its unfunded loan commitments as of the balance sheet date. Any credit loss reserve for unfunded loan commitments is recorded in accounts payable, accrued expenses and other liabilities on the Company’s condensed consolidated balance sheets.

The unallocated component of the Company’s allowance for loan losses represents its estimate of probable losses inherent in the loan portfolio as of the balance sheet date where the specific loan that the loan loss relates to is indeterminable. The Company estimates the unallocated component of the allowance for loan losses through a comprehensive review of its loan portfolio and identifies certain loans that demonstrate possible indicators of impairment, including internally assigned credit quality indicators. This assessment excludes all loans that are determined to be impaired and as a result, an allocated reserve has been recorded as described in the preceding paragraph. Such indicators include the current and/or forecasted financial performance and liquidity profile of the issuer, specific industry or economic conditions that may impact the issuer, and the observable trading price of the loan if available. All loans are first categorized based on their assigned risk grade and further stratified based on the seniority of the loan in the issuer’s capital structure. The seniority classifications assigned to loans are senior secured, second lien and subordinate. Senior secured consists of loans that are the most senior debt in an issuer’s capital structure and therefore have a lower estimated loss severity than other debt that is subordinate to the senior secured loan. Senior secured loans often have a first lien on some or all of the issuer’s assets. Second lien consists of loans that are secured by a second lien interest on some or all of the issuer’s assets; however, the loan is subordinate to the first lien debt in the issuer’s capital structure. Subordinate consists of loans that are generally unsecured and subordinate to other debt in the issuer’s capital structure.

There are three internally assigned risk grades that are applied to loans that have not been identified as being impaired: high, moderate and low. High risk means that there is evidence of possible loss due to the financial or operating performance and liquidity of the issuer, industry or economic concerns specific to the issuer, or other factors that indicate that the breach of a covenant contained in the related loan agreement is possible. Moderate risk means that while there is not observable evidence of possible loss, there are issuer and/or industry specific trends that indicate a loss may have occurred. Low risk means that while there is no identified evidence of loss, there is the risk of loss inherent in the loan that has not been identified. All loans held for investment, with the exception of loans that have been identified as impaired, are assigned a risk grade of high, moderate or low.

The Company applies a range of default and loss severity estimates in order to estimate a range of loss outcomes upon which to base its estimate of probable losses that results in the determination of the unallocated component of the Company’s allowance for loan losses.

Corporate Loans Held for Sale

From time to time the Company makes the determination to transfer certain of its corporate loans from held for investment to held for sale. The decision to transfer a loan to held for sale is generally as a result of the Company determining that the respective loan’s credit quality in relation to the loan’s expected risk-adjusted return no longer meets the Company’s investment objective and/or the Company deciding to reduce or eliminate its exposure to a particular loan for risk management purposes. Corporate loans held for sale are stated at lower of cost or estimated fair value and are assessed on an individual basis. Prior to transferring a loan to held for sale, any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to the yield by the interest method. The loan is transferred from held for investment to held for sale at the lower of its cost or estimated fair value and is carried at the lower of its cost or estimated fair value thereafter. Subsequent to transfer and while the loan is held for sale, recognition as an adjustment to yield by the interest method is discontinued for any difference between the carrying amount of the loan and its outstanding principal balance.

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From time to time the Company also makes the determination to transfer certain of its corporate loans from held for sale back to held for investment. The decision to transfer a loan back to held for investment is generally as a result of the circumstances that led to the initial transfer to held for sale no longer being present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy. The loan is transferred from held for sale back to held for investment at the lower of its cost or estimated fair value, whereby a new cost basis is established based on this amount.

Interest income on corporate loans held for sale is recognized through accrual of the stated coupon rate for the loans, unless the loans are placed on non-accrual status, at which point previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using either the cost-recovery method or on a cash-basis.

Corporate Loans, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain corporate loans for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these corporate loans. Corporate loans carried at estimated fair value are included within corporate loans, net on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statement of operations.

Oil and Natural Gas Properties

Oil and natural gas producing activities are accounted for under the successful efforts method of accounting. Under this method, exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found. Lease acquisition costs are capitalized when incurred. Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs and costs of certain nonproducing leasehold costs are expensed as incurred.

Expenditures for repairs and maintenance are charged to expense as incurred.

The capitalized costs of producing oil and natural gas properties are depleted on a field-by-field basis using the units-of production method based on the ratio of current production to estimated total net proved oil, natural gas and NGL reserves. Proved developed reserves are used in computing depletion rates for drilling and development costs and total proved reserves are used for depletion rates of leasehold costs.

Estimated dismantlement and abandonment costs for oil and natural gas properties, net of salvage value, are capitalized at their estimated net present value and amortized on a unit-of-production basis over the remaining life of the related proved developed reserves.

Oil and Gas Revenue Recognition

Oil, natural gas and NGL revenues are recognized when production is sold to a purchaser at fixed or determinable prices, when delivery has occurred and title has transferred and collectability of the revenue is reasonably assured. The Company follows the sales method of accounting for natural gas revenues. Under this method of accounting, revenues are recognized based on volumes sold, which may differ from the volume to which we are entitled based on the Company’s working interest. An imbalance is recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the under-produced owners to recoup its entitled share through future production. Under the sales method, no receivables are recorded when the Company has taken less than its share of production and no payables are recorded when the Company has taken more than its share of production.

Long-Lived Assets

The Company evaluates its proved oil and natural gas properties and related equipment and facilities for impairment on a field-by-field basis, whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, future operating costs and a discount rate commensurate with the risk on the properties and cost of capital. Unproved oil and natural gas properties are assessed periodically and, at a minimum, annually on a property-by-property basis, and any impairment in value is recognized when incurred.

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Borrowings

The Company finances the majority of its investments through the use of secured borrowings in the form of securitization transactions structured as non-recourse secured financings and other secured and unsecured borrowings. In addition, the Company finances certain of its oil and gas asset acquisitions through borrowings. The Company recognizes interest expense on all borrowings on an accrual basis.

Trust Preferred Securities

Trusts formed by the Company for the sole purpose of issuing trust preferred securities are not consolidated by the Company as the Company has determined that it is not the primary beneficiary of such trusts. The Company’s investment in the common securities of such trusts is included within other assets on the condensed consolidated balance sheets.

Preferred Shares

Distributions on the Company’s 7.375% Series A LLC Preferred Shares (“Series A LLC Preferred Shares”) are cumulative and payable quarterly when and if declared by the Company’s board of directors at a 7.375% rate per annum. The Company accrues for the distribution upon declaration and is included within accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets.

Derivative Instruments

The Company recognizes all derivatives on the condensed consolidated balance sheet at estimated fair value. On the date the Company enters into a derivative contract, the Company designates and documents each derivative contract as one of the following at the time the contract is executed: (i) a hedge of a recognized asset or liability (“fair value” hedge); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (iii) a hedge of a net investment in a foreign operation; or (iv) a derivative instrument not designated as a hedging instrument (“free-standing derivative”). For a fair value hedge, the Company records changes in the estimated fair value of the derivative instrument and, to the extent that it is effective, changes in the fair value of the hedged asset or liability in the current period earnings in the same financial statement category as the hedged item. For a cash flow hedge, the Company records changes in the estimated fair value of the derivative to the extent that it is effective in accumulated other comprehensive loss and subsequently reclassifies these changes in estimated fair value to net income in the same period(s) that the hedged transaction affects earnings. The effective portion of the cash flow hedges is recorded in the same financial statement category as the hedged item. For free-standing derivatives, the Company reports changes in the fair values in other income.

The Company formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Company’s evaluation of effectiveness of its hedged transactions. Periodically, the Company also formally assesses whether the derivative it designated in each hedging relationship is expected to be and has been highly effective in offsetting changes in estimated fair values or cash flows of the hedged item using either the dollar offset or the regression analysis method. If the Company determines that a derivative is not highly effective as a hedge, it discontinues hedge accounting.

Foreign Currency

The Company makes investments in non-United States dollar denominated securities and loans. As a result, the Company is subject to the risk of fluctuation in the exchange rate between the United States dollar and the foreign currency in which it makes an investment. In order to reduce the currency risk, the Company may hedge the applicable foreign currency. All investments denominated in a foreign currency are converted to the United States dollar using prevailing exchange rates on the balance sheet date.

Income, expenses, gains and losses on investments denominated in a foreign currency are converted to the United States dollar using the prevailing exchange rates on the dates when they are recorded. Foreign exchange gains and losses are recorded in the condensed consolidated statements of operations.

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Manager Compensation

The Management Agreement provides for the payment of a base management fee to the Manager, as well as an incentive fee if the Company’s financial performance exceeds certain benchmarks. Additionally, the Management Agreement provides for the Manager to be reimbursed for certain expenses incurred on the Company’s behalf. The base management fee and the incentive fee are accrued and expensed during the period for which they are earned by the Manager.

Share-Based Compensation

The Company accounts for share-based compensation issued to its directors and to its Manager using the fair value based methodology in accordance with relevant accounting guidance. Compensation cost related to restricted common shares issued to the Company’s directors is measured at its estimated fair value at the grant date, and is amortized and expensed over the vesting period on a straight-line basis. Compensation cost related to restricted common shares and common share options issued to the Manager is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards are unvested. The Company has elected to use the graded vesting attribution method to amortize compensation expense for the restricted common shares and common share options granted to the Manager.

Income Taxes

The Company intends to continue to operate so as to qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation. Therefore, the Company generally is not subject to United States federal income tax at the entity level, but is subject to limited state and foreign taxes. Holders of the Company’s common and preferred shares will be required to take into account their allocable share of each item of the Company’s income, gain, loss, deduction, and credit for the taxable year of the Company ending within or with their taxable year.

The Company owns equity interests in entities that have elected or intend to elect to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). A REIT generally is not subject to United States federal income tax to the extent that it currently distributes its income and satisfies certain asset, income and ownership tests, and recordkeeping requirements, but it may be subject to some amount of federal, state, local and foreign taxes based on its taxable income.

The Company has wholly-owned domestic and foreign subsidiaries that are taxable as corporations for United States federal income tax purposes and thus are not consolidated with the Company for United States federal income tax purposes. For financial reporting purposes, current and deferred taxes are provided for on the portion of earnings recognized by the Company with respect to its interest in the domestic taxable corporate subsidiaries, because each is taxed as a regular corporation under the Code. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP consolidated financial statements and the United States federal income tax basis of assets and liabilities as of each consolidated balance sheet date. The foreign corporate subsidiaries were formed to make certain foreign and domestic investments from time to time. The foreign corporate subsidiaries are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands, and are anticipated to be exempt from United States federal and state income tax at the corporate entity level because they restrict their activities in the United States to trading in stock and securities for their own account. However, the Company will be required to include their current taxable income in the Company’s calculation of its taxable income allocable to shareholders.

The Company must recognize the tax impact from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax impact recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain tax positions are recorded as tax expense. Significant judgment is required in the identification of uncertain tax positions and in the estimation of penalties and interest on uncertain tax positions. If it is determined that recognition for an uncertain tax provision is necessary, the Company would record a liability for an unrecognized tax expense from an uncertain tax position taken or expected to be taken.

Earnings Per Common Share

The Company presents both basic and diluted earnings per common share (“EPS”) in its condensed consolidated financial statements and footnotes thereto. Basic earnings per common share (“Basic EPS”) excludes dilution and is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares, including vested restricted common shares, outstanding for the period. The Company calculates EPS using the more dilutive of the two-class method or the if-converted method. The two-class method is an earnings allocation formula that determines EPS for common shares and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether

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paid or unpaid) are participating securities and shall be included in the computation of EPS using the two-class method. Accordingly, all earnings (distributed and undistributed) are allocated to common shares, preferred shares and participating securities based on their respective rights to receive dividends. Diluted earnings per common share (“Diluted EPS”) reflects the potential dilution of common share options, unvested restricted common shares and convertible senior notes using the treasury method or if-converted method.

NOTE 3. EARNINGS PER COMMON SHARE

The following table presents a reconciliation of basic and diluted net income per common share for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands, except per share information), as well as the distributions declared per common share during the three and nine months ended September 30, 2013 and 2012:

	Three months ended September 30				Nine months ended September 30
	2013		2012		2013		2012
Net income	$	39,886	$	111,964	$	224,354	$	271,217
Less: Preferred share distributions	6,891		—		20,520		—
Net income available to common shareholders	$	32,995	$	111,964	$	203,834	$	271,217
Less: Dividends and undistributed earnings allocated to participating securities	109		355		701		889
Net income allocated to common shareholders	$	32,886	$	111,609	$	203,133	$	270,328
Basic:
Basic weighted average common shares outstanding	204,134		177,862		201,824		177,815
Net income per common share	$	0.16	$	0.63	$	1.01	$	1.52
Diluted:
Basic weighted average common shares outstanding	204,134		177,862		201,824		177,815
Dilutive effect of convertible senior notes(1)	—		5,569		—		4,625
Diluted weighted average common shares outstanding(2)	204,134		183,431		201,824		182,440
Net income per common share	$	0.16	$	0.61	$	1.01	$	1.48

(1)During the first quarter of 2013, $172.5 million of the Company’s outstanding convertible notes had been tendered for conversion and were settled with 26.1 million common shares.

(2)Potential anti-dilutive common shares excluded from diluted earnings per share related to common share options were 1,932,279 for the three and nine months ended September 30, 2013 and 2012.

NOTE 4. SECURITIES

The Company accounts for securities based on the following categories: (i) securities available-for-sale, which are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive loss; (ii) other securities, at estimated fair value, with unrealized gains and losses recorded in the condensed consolidated statements of operations; and (iii) RMBS, at estimated fair value, with unrealized gains and losses recorded in the condensed consolidated statements of operations.

The following table summarizes the Company’s securities as of September 30, 2013, which are carried at estimated fair value (amounts in thousands):

	September 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale	$	348,582	$	21,863	$	(2,069	)	$	368,376
Other securities, at estimated fair value(1)	62,618		10,929		(1,634		)	71,913
Residential mortgage-backed securities, at estimated fair value(1)	144,640		3,196		(68,450		)	79,386
Total securities	$	555,840	$	35,988	$	(72,153	)	$	519,675

(1)Unrealized gains and losses are recorded in earnings.

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The following table summarizes the Company’s securities as of December 31, 2012, which are carried at estimated fair value (amounts in thousands):

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale	$	394,821	$	27,281	$	(9,809	)	$	412,293
Other securities, at estimated fair value(1)	27,991		9,768		(374		)	37,385
Residential mortgage-backed securities, at estimated fair value(1)	171,385		3,762		(91,305		)	83,842
Total securities	$	594,197	$	40,811	$	(101,488	)	$	533,520

(1)Unrealized gains and losses are recorded in earnings.

The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale securities, aggregated by length of time that the individual securities have been in a continuous unrealized loss position as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	Less Than 12 months					12 Months or More					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
September 30, 2013
Securities available-for-sale	$	3,913	$	(125	)	$	28,655	$	(1,944	)	$	32,568	$	(2,069	)
December 31, 2012
Securities available-for-sale	$	45,900	$	(4,398	)	$	37,500	$	(5,411	)	$	83,400	$	(9,809	)

The unrealized losses in the table above are considered to be temporary impairments due to market factors and are not reflective of credit deterioration. The Company considers many factors when evaluating whether impairment is other-than-temporary. For securities available-for-sale included in the table above, the Company does not intend to sell them and does not believe that it is more likely than not that the Company will be required to sell any of its securities available-for-sale prior to recovery. In addition, based on the analyses performed by the Company on each of its securities available-for-sale, the Company believes that it is able to recover the entire amortized cost amount of the securities available-for-sale included in the table above.

During the three and nine months ended September 30, 2013, the Company recognized losses totaling $5.0 million and $17.5 million, respectively, for securities available-for-sale that it determined to be other-than-temporarily impaired. During the three and nine months ended September 30, 2012, the Company recognized losses totaling $7.4 million and $8.2 million, respectively, for securities available-for-sale that it determined to be other-than-temporarily impaired. The Company intends to sell these securities and as a result, the entire amount of the loss is recorded through earnings in net realized and unrealized gain on investments in the condensed consolidated statements of operations.

For common and preferred stock, the Company considers many factors when evaluating whether impairment is other-than-temporary, including its intent and ability to hold the common and preferred stock for a period of time sufficient for recovery to cost. If the Company believes it will not recover the cost basis based on its intent or ability, an other-than-temporary loss will be recorded through earnings in net realized and unrealized gain on investments in the condensed consolidated statements of operations.

During both the three and nine months ended September 30, 2013, the Company recognized no losses for common and preferred stock that it determined to be other-than-temporarily impaired. As of September 30, 2013, the Company had no investments in common or preferred stock. During the three and nine months ended September 30, 2012, the Company recognized zero and $0.2 million of losses for common and preferred stock that it determined to be other-than-temporarily impaired.

As of September 30, 2013, the Company had a corporate debt security from one issuer in default with an estimated fair value of $23.6 million, which was on non-accrual status. As of December 31, 2012, the Company had no corporate debt securities in default.

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Securities available-for-sale sold at a loss typically include those that the Company determined to be other-than-temporarily impaired or had deterioration in credit quality. The following table shows the net realized gains on the sales of securities available-for-sale (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Gross realized gains	$	—	$	42,108	$	2,829		$	77,075
Gross realized losses	—		—		(6		)	(12		)
Net realized gains(1)	$	—	$	42,108	$	2,823		$	77,063

(1)Excludes net realized gains from paydowns and restructurings totaling zero and $2.4 million, including a $1.6 million premium on bond redemption, for the three and nine months ended September 30, 2013, respectively. Excludes net realized losses and gains from paydowns and restructurings totaling $(0.3) million, including a $0.4 million loss on bond redemption, and $16.0 million, including a $0.4 million premium on bond redemption, for the three and nine months ended September 30, 2012, respectively. Also, excludes an impairment charge of $5.0 million and $17.5 million for investments which were determined to be other-than-temporarily impaired for the three and nine months ended September 30, 2013, respectively. Comparatively, excludes an impairment charge of $7.4 million and $8.4 million for investments which were determined to be other-than-temporarily impaired for the three and nine months ended September 30, 2012, respectively.

Concentration Risk

The Company’s corporate debt securities portfolio, which includes securities available-for-sale and other securities at estimated fair value, has certain credit risk concentrated in a limited number of issuers. As of September 30, 2013, approximately 50% of the estimated fair value of the Company’s corporate debt securities portfolio was concentrated in ten issuers, with the three largest concentrations of debt securities in securities issued by NXP Semiconductor NV, Avaya, Inc. and Catalina Marketing Corp., which combined represented $82.9 million, or approximately 19% of the estimated fair value of the Company’s corporate debt securities. As of December 31, 2012, approximately 51% of the estimated fair value of the Company’s corporate debt securities portfolio, was concentrated in ten issuers, with the three largest concentrations of debt securities in securities issued by Sanmina Corporation, Avaya, Inc. and iPayment, Inc., which combined represented $87.0 million, or approximately 19% of the estimated fair value of the Company’s corporate debt securities.

Pledged Assets

Note 7 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged securities for borrowings. The following table summarizes the estimated fair value of securities available-for-sale pledged as collateral as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013		As of December 31, 2012
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	327,210	$	354,088
Total	$	327,210	$	354,088

As of September 30, 2013 and December 31, 2012, no other securities, at estimated fair value or RMBS were pledged as collateral for the Company’s borrowings.

NOTE 5. CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES

The Company accounts for loans based on the following categories (i) corporate loans held for investment, which are measured based on their outstanding principal plus or minus unaccreted purchase discounts and unamortized purchase premiums, net of an allowance for loan losses; (ii) corporate loans held for sale, which are measured at lower of cost or estimated fair value; and (iii) corporate loans, at estimated fair value.

The following table summarizes the Company’s corporate loans as of September 30, 2013 (amounts in thousands):

	September 30, 2013
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,006,179		$	362,853		$	189,367		$	6,558,399
Net unamortized discount	(109,420		)	(25,698		)	(38,316		)	(173,434		)
Total amortized cost	5,896,759			337,155			151,051			6,384,965
Lower of cost or fair value adjustment	—			(24,843		)	—			(24,843		)
Allowance for loan losses	(212,594		)	—			—			(212,594		)
Unrealized gains	—			—			5,544			5,544
Net carrying value	$	5,684,165		$	312,312		$	156,595		$	6,153,072

(1)Principal amounts of corporate loans and corporate loans held for sale are net of cumulative charge-offs and other adjustments totaling $21.1 million as of September 30, 2013.

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The following table summarizes the Company’s corporate loans as of December 31, 2012 (amounts in thousands):

	December 31, 2012
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,143,599		$	231,231		$	56,931		$	6,431,761
Net unamortized discount	(136,438		)	(88,895		)	(23,277		)	(248,610		)
Total amortized cost	6,007,161			142,336			33,654			6,183,151
Lower of cost or fair value adjustment	—			(14,047		)	—			(14,047		)
Allowance for loan losses	(223,472		)	—			—			(223,472		)
Unrealized gains	—			—			2,225			2,225
Net carrying value	$	5,783,689		$	128,289		$	35,879		$	5,947,857

(1)Principal amounts of corporate loans and corporate loans held for sale are net of cumulative charge-offs and other adjustments totaling $51.6 million as of December 31, 2012.

Allowance for Loan Losses

As of September 30, 2013 and December 31, 2012, the Company had an allowance for loan losses of $212.6 million and $223.5 million, respectively. As described in Note 2 to these condensed consolidated financial statements, the allowance for loan losses represents the Company’s estimate of probable credit losses inherent in its loan portfolio as of the balance sheet date. The Company’s allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses consists of individual loans that are impaired. The unallocated component of the allowance for loan losses represents the Company’s estimate of losses inherent, but not identified, in its portfolio as of the balance sheet date.

The following table summarizes the changes in the allowance for loan losses for the Company’s corporate loan portfolio during the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012			For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Allowance for loan losses:
Beginning balance	$	203,255	$	235,807		$	223,472		$	191,407
Provision for loan losses	9,339		—			20,407			46,498
Charge-offs	—		(9,925		)	(31,285		)	(12,023		)
Ending balance	$	212,594	$	225,882		$	212,594		$	225,882

The following table summarizes the ending balances of the allowance and corporate loans portfolio by basis of impairment method as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	September 30, 2013		December 31, 2012(1)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	132,823	$	94,863
Ending balance: collectively evaluated for impairment	79,771		128,609
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	212,594	$	223,472
Corporate loans (recorded investment)(2):
Ending balance: individually evaluated for impairment	$	554,541	$	445,437
Ending balance: collectively evaluated for impairment	5,356,849		5,583,622
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	5,911,390	$	6,029,059

(1)Certain prior period information has been reclassified to conform to the current year presentation to segregate the Company’s corporate loan portfolio between those that are included in the allocated component of the allowance for loan losses (individually evaluated) and those included in the unallocated component of the allowance for loan losses (collectively evaluated).

(2)Recorded investment is defined as amortized cost plus accrued interest.

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As of September 30, 2013, the allocated component of the allowance for loan losses totaled $132.8 million and relates to investments in certain loans issued by four issuers with an aggregate par amount of $594.5 million and an aggregate recorded investment of $554.5 million. Of the allocated component totaling $132.8 million, $69.5 million related to Texas Competitive Electric Holdings Company LLC (“TXU”), which had an aggregate amortized cost of $311.6 million as of September 30, 2013. As of December 31, 2012, the allocated component of the allowance for loan losses totaled $94.9 million and related to investments in certain loans issued by six issuers with an aggregate par amount of $484.1 million and an aggregate recorded investment of $445.4 million.

The following table summarizes the Company’s recorded investment and unpaid principal balance in impaired loans, as well as the related allowance for credit losses as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	September 30, 2013						December 31, 2012
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Recorded Investment(1)		Unpaid Principal Balance		Related Allowance
With no related allowance recorded	$	—	$	—	$	—	$	6,490	$	19,931	$	—
With an allowance recorded	554,541		594,548		132,823		438,947		464,214		94,863
Total	$	554,541	$	594,548	$	132,823	$	445,437	$	484,145	$	94,863

(1)Recorded investment is defined as amortized cost plus accrued interest.

The following table summarizes the Company’s average recorded investment in impaired loans and interest income recognized for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013				For the three months endedSeptember 30, 2012				For the nine months endedSeptember 30, 2013				For the nine months endedSeptember 30, 2012
	Average Recorded Investment(1)		InterestIncome Recognized		Average Recorded Investment(1)		InterestIncome Recognized		Average Recorded Investment(1)		InterestIncome Recognized		Average Recorded Investment(1)		InterestIncome Recognized
With no related allowance recorded	$	—	$	—	$	5,605	$	103	$	1,623	$	—	$	2,803	$	103
With an allowance recorded	554,554		4,471		209,375		3,941		517,544		14,740		139,117		5,722
Total	$	554,554	$	4,471	$	214,980	$	4,044	$	519,167	$	14,740	$	141,920	$	5,825

(1)Recorded investment is defined as amortized cost plus accrued interest.

As of September 30, 2013 and December 31, 2012, the allocated component of the allowance for loan losses included all impaired loans. While all of the Company’s impaired loans are on non-accrual status, the Company’s non-accrual loans also include (i) other loans held for investment, (ii) corporate loans held for sale and (iii) loans carried at estimated fair value, which are not reflected in the table above. Any of these three classifications may include those loans modified in a TDR, which are typically designated as being non-accrual (see “Troubled Debt Restructurings” section below).

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The following table summarizes the Company’s recorded investment in non-accrual loans as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	September 30, 2013		December 31, 2012
Loans held for investment(1)	$	554,541	$	445,437
Loans held for sale	51,076		90,840
Loans at estimated fair value	13,191		—
Total non-accrual loans	$	618,808	$	536,277

(1)Comprised of impaired loans held for investment as of both September 30, 2013 and December 31, 2012.

The amount of interest income recognized using the cash-basis method during the time within the period that the loans were on non-accrual status was $5.5 million, which included $4.5 million for non-accrual loans that were held for investment and $1.0 million for non-accrual loans held for sale, for the three months ended September 30, 2013, and $20.9 million, which included $14.7 million for non-accrual loans that were held for investment and $6.2 million for non-accrual loans held for sale, for the nine months ended September 30, 2013. The amount of interest income recognized using the cash-basis method during the time within the period that the loans were on non-accrual was $8.4 million, which included $4.0 million for non-accrual loans that were held for investment and $4.4 million for non-accrual loans held for sale, for the three months ended September 30, 2012, and $15.1 million, which included $5.8 million for non-accrual loans that were held for investment and $9.3 million for non-accrual loans held for sale, for the nine months ended September 30, 2012.

A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. A loan may be placed on non-accrual status regardless of whether or not such loan is considered past due. As of September 30, 2013, the Company held a total recorded investment of $203.7 million of non-accrual and past due loans held for investment from two issuers, both of which were in default as of September 30, 2013. The associated past due interest payments related to the $203.7 million recorded investment was $2.5 million, of which $0.4 million was less than 30 days past due, $0.8 million was 30-59 days past due, $0.7 million was 60-89 days past due, and $0.6 million was 90 or more days past due. In addition, as of September 30, 2013, the Company held $15.5 million par amount and $11.4 million estimated fair value of non-accrual and past due loans carried at estimated fair value from one issuer, which was also in default as of September 30, 2013. The associated interest payments related to the $11.4 million loans at estimated fair value that were 90 or more days past due was less than $0.1 million. The Company did not have any corporate loans past due as of December 31, 2012.

The unallocated component of the allowance for loan losses totaled $79.8 million and $128.6 million as of September 30, 2013 and December 31, 2012, respectively. As described in Note 2 to these condensed consolidated financial statements, the Company estimates the unallocated component of the allowance for loan losses through a comprehensive review of its loan portfolio and identifies certain loans that demonstrate possible indicators of impairments, including credit quality indicators. The following table summarizes how the Company determines internally assigned grades related to credit quality based on a combination of concern as to probability of default and the seniority of the loan in the issuer’s capital structure as of September 30, 2013 and December 31, 2012 (amounts in thousands):

Internally Assigned Grade	Capital Hierarchy	Recorded Investment September 30, 2013 (1)		Recorded Investment December 31, 2012 (1)
High	Senior Secured Loan	$	27,093	$	525,562
	Second Lien Loan	286,974		287,892
	Subordinated	11,302		10,621
		$	325,369	$	824,075
Moderate	Senior Secured Loan	$	986,481	$	826,107
	Second Lien Loan	27,504		27,585
	Subordinated	37,070		38,374
		$	1,051,055	$	892,066
Low	Senior Secured Loan	$	3,900,851	$	3,716,831
	Second Lien Loan	41,619		68,917
	Subordinated	37,955		81,733
		$	3,980,425	$	3,867,481
	Total Unallocated	$	5,356,849	$	5,583,622
	Total Allocated	554,541		445,437
	Total Loans Held for Investment	$	5,911,390	$	6,029,059

(1)Recorded investment is defined as amortized cost plus accrued interest.

During the three and nine months ended September 30, 2013, the Company recorded charge-offs totaling zero and $31.3 million comprised primarily of loans modified in TDRs, respectively. During the three and nine months ended September 30, 2012, the Company recorded charge-offs totaling $9.9 million and $12.0 million, respectively, comprised primarily of a loan that was restructured and loans transferred to loans held for sale.

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Loans Held For Sale and the Lower of Cost or Fair Value Adjustment

As of September 30, 2013 and December 31, 2012, the Company had $312.3 million and $128.3 million of loans held for sale, respectively. During the three and nine months ended September 30, 2013, the Company transferred $239.2 million and $316.0 million amortized cost amount, respectively, of loans from held for investment to held for sale. During the three and nine months ended September 30, 2012, the Company transferred $24.0 million and $87.0 million amortized cost amount, respectively, of loans from held for investment to held for sale. The transfers of certain loans to held for sale were due to the Company’s determination that credit quality of a loan in relation to its expected risk-adjusted return no longer met the Company’s investment objective and the determination by the Company to reduce or eliminate the exposure for certain loans as part of its portfolio risk management practices. Also, during both the three and nine months ended September 30, 2013, the Company did not transfer any loans held for sale back to loans held for investment. During the three and nine months ended September 30, 2012, the Company transferred $49.0 million and $114.9 million amortized cost amount, respectively, from loans held for sale back to loans held for investment at the lower of cost or estimated fair value. These transfers back to held for investment occurred as the circumstances that led to the initial transfer to held for sale were no longer present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy.

The Company recorded a $2.8 million and $11.4 million net charge to earnings for the three and nine months ended September 30, 2013, respectively, for the lower of cost or estimated fair value adjustment for certain loans held for sale, which had a carrying value of $312.3 million as of September 30, 2013. Comparatively, the Company recorded a $7.4 million and $1.3 million reduction to the lower of cost or estimated fair value adjustment during the three and nine months ended September 30, 2012, respectively, for certain loans held for sale, which had a carrying value of $137.9 million as of September 30, 2012.

Defaulted Loans

As of September 30, 2013, the Company held six corporate loans that were in default with a total amortized cost of $215.7 million from two issuers. Of the $215.7 million total amortized cost, $203.7 million were included in the loans that comprised the allocated component of the Company’s allowance for loan losses and $12.0 million were included in loans carried at estimated fair value. As of December 31, 2012, the Company held two corporate loans that were in default with a total amortized cost of $50.4 million from one issuer and were included in the loans that comprised the allocated component of the Company’s allowance for loan losses.

Troubled Debt Restructurings

The recorded investment balance of TDRs totaled $61.7 million related to four TDRs and $25.5 million related to one TDR at September 30, 2013 and December 31, 2012, respectively. Loans whose terms have been modified in a TDR are considered impaired, unless accounted for at fair value or the lower of cost or estimated fair value, and are typically placed on non-accrual status, but can be moved to accrual status when, among other criteria, payment in full of all amounts due under the restructured terms is expected and the borrower has demonstrated a sustained period of repayment performance, typically six months. As of September 30, 2013 and December 31, 2012, $61.7 million and $25.5 million of TDRs were included in non-accrual loans, respectively (see “Allowance for Loan Losses” section above). As of September 30, 2013 and December 31, 2012, the allowance for loan losses included specific reserves of $9.4 million and $0.5 million related to TDRs, respectively. As of September 30, 2013, there were no commitments to lend additional funds to the borrowers whose loans had been modified in a TDR.

The following table presents the aggregate balance of loans by loan class whose terms have been modified in a TDR during the three and nine months ended September 30, 2013. There were zero and three new TDRs during the three and nine months ended September 30, 2013, respectively, and no loans were modified in a TDR during both the three and nine months ended September 30, 2012. The modifications in the first quarter of 2013 involved conversions of the loans into one of the following: (i) new term loans with extended maturities and fixed, rather than floating, interest rates, (ii) equity carried at estimated fair value, or (iii) a combination of equity and loans carried at estimated fair value. The modification involving an extension of maturity date was for an additional four-year period with a higher coupon of 6.8%.

	Three months endedSeptember 30, 2013					Nine months endedSeptember 30, 2013
	Number of loans	Pre-modification outstanding recorded investment(1)		Post-modification outstanding recorded investment(1)		Number of loans	Pre-modification outstanding recorded investment(1)		Post-modification outstanding recorded investment(1)(2)
Troubled debt restructurings:
Loans held for investment	—	$	—	$	—	2	$	68,358	$	39,430
Loans held for sale	—	—		—		—	—		—
Loans at estimated fair value	—	—		—		1	1,670		1,229
Total	—	$	—	$	—	3	$	70,028	$	40,659

(1)Recorded investment is defined as amortized cost plus accrued interest.

(2)Excludes equity securities received from the TDRs with an estimated fair value of $2.1 million.

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Prior to TDRs in the first quarter of 2013, two of the new TDRs described above were already identified as impaired and had specific allocated reserves, while the third was a loan carried at estimated fair value. Upon restructuring the two impaired loans held for investment, the difference between the recorded investment of the pre-modified loans and the estimated fair value of the new assets was charged-off against the allowance for loan losses. The TDRs resulted in zero and $26.8 million of charge-offs for the three and nine months ended September 30, 2013, respectively, which comprised 86% of the total $31.3 million of charge-offs recorded during the nine months ended September 30, 2013.

As of September 30, 2013, no loans modified as TDRs were in default within a twelve month period subsequent to their original restructuring.

The Company modified $195.6 million and $2.0 billion amortized cost of corporate loans during the three and nine months ended September 30, 2013, respectively, that did not qualify as TDRs. The Company modified $346.7 million and $1.4 billion amortized cost of corporate loans during the three and nine months ended September 30, 2012, respectively, that did not qualify as TDRs. These modifications involved changes in existing rates and maturities to prevailing market rates/maturities for similar instruments and did not qualify as TDRs as the respective borrowers were neither experiencing financial difficulty nor were seeking (nor granted) a concession as part of the modification. In addition, these modifications of non-troubled debt holdings were accomplished with modified loans that were not substantially different from the loans prior to modification.

Concentration Risk

The Company’s corporate loan portfolio has certain credit risk concentrated in a limited number of issuers. As of September 30, 2013, approximately 47% of the total amortized cost basis of the Company’s corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by TXU, Modular Space Corporation and U.S. Foods Inc., which combined represented $935.8 million or approximately 15% of the aggregated amortized cost basis of the Company’s corporate loans. As of December 31, 2012, approximately 46% of the total amortized cost basis of the Company’s corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foods Inc., TXU and Modular Space Corporation, which combined represented $1.0 billion, or approximately 16% of the aggregated amortized cost basis of the Company’s corporate loans.

Pledged Assets

Note 7 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged loans for borrowings. The following table summarizes the amortized cost of corporate loans and corporate loans held for sale pledged as collateral as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013		As ofDecember 31, 2012
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	5,997,105	$	5,804,026
Total	$	5,997,105	$	5,804,026

As of September 30, 2013 and December 31, 2012, no corporate loans carried at estimated fair value were pledged as collateral for the Company’s borrowings.

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NOTE 6. NATURAL RESOURCES ASSETS

Natural Resources Properties

The following table summarizes the Company’s oil and gas properties as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013			As of December 31, 2012
Proved oil and natural gas properties (successful efforts method)	$	394,370		$	315,446
Unproved oil and natural gas properties	35,445			2,596
Less: Accumulated depreciation, depletion and amortization	(57,781		)	(28,113		)
Oil and gas properties, net	$	372,034		$	289,929

The Company did not record any impairment for the three and nine months ended September 30, 2013. During the three and nine months ended September 30, 2012, the Company recorded $0.3 million and $3.3 million, respectively, of impairments.

Acquisitions

The Company accounts for certain of its oil and natural gas properties as business combinations under the acquisition method of accounting.

During 2013, the Company capitalized $3.1 million primarily as a result of covering costs related to certain oil and gas properties. Accordingly, this balance is included in oil and gas properties, net on the condensed consolidated balance sheets.

During 2012, the Company completed the acquisition of certain oil and natural gas properties located in Louisiana, Mississippi and Texas (most notably in the Barnett and Eagle Ford Shale), by funding approximately $178.3 million including working capital and costs, partially financed through its asset-based borrowing facility.

The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition dates. As these acquisitions were accounted for under the acquisition method of accounting, the Company conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. Transaction and integration costs associated with the acquisitions were expensed as incurred.

The initial accounting for the 2012 business combinations was not complete and adjustments were subsequently recorded as additional information was obtained about the facts and circumstances that existed as of the acquisition dates. During the nine months ended September 30, 2013, the Company recorded adjustments to the recognized fair values of the identifiable assets acquired and liabilities assumed in connection with the Company’s acquisitions as of their respective acquisition dates. The table below reflects updated 2012 information including an increase of $3.8 million to both proved property and accounts payable and accrued liabilities (amounts in thousands):

	2013		2012
Proved property	$	—	$	164,557
Unproved property	—		2,658
Other assets	—		16,789
Risk management liabilities	—		(1,037		)
Accounts payable and accrued liabilities	—		(9,030		)
Asset retirement obligation	—		(5,491		)
Total	$	—	$	168,446

Development and Other Purchases

During 2013, the Company capitalized an additional $104.2 million as a result of purchasing natural resources assets or covering costs related to the development of oil and gas properties. Accordingly, this balance is included in oil and gas properties, net on the condensed consolidated balance sheets.

In addition to the acquisitions above, during 2012, the Company participated and earned working interests in oil and natural gas properties located in Texas by funding approximately $1.4 million including costs. This amount is included in oil and gas properties, net on the condensed consolidated balance sheets.

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NOTE 7. BORROWINGS

Certain information with respect to the Company’s borrowings as of September 30, 2013 is summarized in the following table (dollar amounts in thousands):

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Collateral(1)
CLO 2005-1 senior secured notes	$	203,361	0.75	%	1,304	$	320,391
CLO 2005-2 senior secured notes	346,465		0.65		1,518	501,943
CLO 2006-1 senior secured notes	405,610		0.70		1,790	665,778
CLO 2007-1 senior secured notes	2,075,040		0.82		2,784	2,428,708
CLO 2007-1 mezzanine notes	292,466		3.37		2,784	342,313
CLO 2007-1 subordinated notes(2)	5,828		19.29		2,784	6,821
CLO 2007-A senior secured notes	448,841		1.57		1,476	557,795
CLO 2007-A mezzanine notes	21,632		7.02		1,476	26,882
CLO 2007-A subordinated notes(2)	4,599		47.00		1,476	5,715
CLO 2011-1 senior debt	266,266		1.62		1,780	319,601
CLO 2012-1 senior secured notes	362,618		2.35		4,094	370,187
CLO 2012-1 subordinated notes(2)	21,500		8.50		4,094	21,949
CLO 2013-1 senior secured notes	449,212		2.04		4,306	368,449
Total collateralized loan obligation secured debt	4,903,438					5,936,532
CLO 2007-1 mezzanine notes to affiliates	32,160		9.76		2,784	37,641
CLO 2007-1 subordinated notes to affiliates(2)	130,270		19.29		2,784	152,473
CLO 2007-A mezzanine notes to affiliates	20,994		7.77		1,476	26,090
CLO 2007-A subordinated notes to affiliates(2)	10,497		47.00		1,476	13,045
Total collateralized loan obligation junior secured notes to affiliates	193,921					229,249
Senior secured credit facility	—		2.50		791	—
2015 Asset-based borrowing facility	48,489		2.18		766	219,424
2018 Asset-based borrowing facility(3)	—		—		1,611	—
Total credit facilities	48,489					219,424
8.375% Senior notes	250,784		8.38		10,273	—
7.500% Senior notes	111,467		7.50		10,398	—
Junior subordinated notes	283,517		5.41		8,439	—
Total borrowings	$	5,791,616				$	6,385,205

(1)Collateral for borrowings consists of the estimated fair value of certain corporate loans, securities available-for-sale and equity investments at estimated fair value. Also includes the carrying value of oil and gas assets. For purposes of this table, collateral for CLO senior and junior secured notes are calculated pro rata based on the outstanding borrowings for each respective CLO.

(2)Subordinated notes do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from each respective CLO. Accordingly, weighted average borrowing rates for the subordinated notes were calculated based on year-to-date annualized estimated distributions, if any.

(3)Borrowing rates range from 1.75% to 3.25% plus London interbank offered rate (‘‘LIBOR’’) per annum based on the amount outstanding.

27

Certain information with respect to the Company’s borrowings as of December 31, 2012 is summarized in the following table (dollar amounts in thousands):

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Collateral(1)
CLO 2005-1 senior secured notes	$	427,317	0.69	%	1,577	$	510,187
CLO 2005-2 senior secured notes	470,516		0.66		1,791	618,000
CLO 2006-1 senior secured notes	601,091		0.69		2,063	846,365
CLO 2007-1 senior secured notes	2,075,040		0.86		3,057	2,298,373
CLO 2007-1 mezzanine notes	203,727		2.81		3,057	225,654
CLO 2007-1 subordinated notes(2)	5,828		26.22		3,057	6,455
CLO 2007-A senior secured notes	601,375		1.50		1,749	698,569
CLO 2007-A mezzanine notes	5,580		7.02		1,749	6,482
CLO 2007-A subordinated notes(2)	4,599		60.24		1,749	5,342
CLO 2011-1 senior debt	343,485		1.67		2,053	421,584
CLO 2012-1 senior secured notes(3)	362,280		2.58		4,367	40,180
CLO 2012-1 subordinated notes(2)(3)	21,500		—		4,367	2,351
Total collateralized loan obligation secured debt	5,122,338					5,679,542
CLO 2007-1 mezzanine notes to affiliates	118,845		6.29		3,057	131,636
CLO 2007-1 subordinated notes to affiliates(2)	130,270		25.89		3,057	144,291
CLO 2007-A mezzanine notes to affiliates	36,945		7.53		1,749	42,916
CLO 2007-A subordinated notes to affiliates(2)	10,497		60.24		1,749	12,194
Total collateralized loan obligation junior secured notes to affiliates	296,557					331,037
Senior secured credit facility	—		2.56		1,064	—
2015 Asset-based borrowing facility	107,789		2.71		1,039	227,415
Total credit facilities	107,789					227,415
7.5% Convertible senior notes	166,028		7.50		1,476	—
8.375% Senior notes	250,735		8.38		10,546	—
7.500% Senior notes	111,443		7.50		10,671	—
Junior subordinated notes	283,517		5.43		8,712	—
Total borrowings	$	6,338,407				$	6,237,994

(1)Collateral for borrowings consists of the estimated fair value of certain corporate loans, securities available-for-sale and equity investments at estimated fair value. Also includes the carrying value of oil and gas assets. For purposes of this table, collateral for CLO senior and junior notes are calculated pro rata based on the outstanding borrowing for each respective CLO.

(2)Subordinated notes do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from each respective CLO. Accordingly, weighted average borrowing rates for the subordinated notes were calculated based on year-to-date annualized estimated distributions, if any.

(3)In addition to the fair value of collateral, CLO 2012-1 held $357.7 million of principal cash as of December 31, 2012 as it was closed on December 21, 2012.

CLO Debt

The indentures governing the Company’s CLO transactions stipulate the reinvestment period during which the collateral manager, which is an affiliate of the Company’s Manager, can generally sell or buy assets at its discretion and can reinvest principal proceeds into new assets. CLO 2007-A, CLO 2005-1 and CLO 2005-2 are no longer in their reinvestment periods. CLO 2006-1 ended its reinvestment period during the third quarter of 2012. As a result, principal proceeds from the assets held in each of these transactions are generally used to amortize the outstanding balance of senior notes outstanding. During the three and nine months ended September 30, 2013, an aggregate $190.8 million and $697.1 million, respectively, of original CLO 2007-A, CLO 2005-1, CLO 2005-2 and CLO 2006-1 senior notes were repaid. During the three and nine months ended September 30, 2012, $114.9 million and $636.7 million, respectively, of original CLO 2007-A, CLO 2005-1 and CLO 2005-2 senior notes were repaid. CLO 2007-1, CLO 2012-1 and CLO 2013-1 will end their reinvestment periods during May 2014, December 2016 and July 2017, respectively. CLO 2011-1 does not have a reinvestment period and all principal proceeds from holdings in CLO 2011-1 are used to amortize the transaction. During the three and nine months ended September 30, 2013, $31.7 million and $77.2 million, respectively, of original CLO 2011-1 senior notes were repaid. During the three and nine months ended September 30, 2012, $10.9 million and $66.1 million, respectively, of original CLO 2011-1 senior notes were repaid.

On September 27, 2013, the Company amended the CLO 2011-1 senior loan agreement (the “CLO 2011-1 Agreement”) to upsize the transaction by $300.0 million, of which CLO 2011-1 is now able to borrow up to an incremental $225.0 million. Under the amended CLO 2011-1 Agreement, CLO 2011-1 matures on August 15, 2020 and borrowings under the CLO 2011-1 Agreement bear interest at a rate of the three-month LIBOR plus 1.35%.

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On June 25, 2013, the Company closed CLO 2013-1, a $519.4 million secured financing transaction maturing on July 15, 2025. The Company issued $458.5 million par amount of senior secured notes to unaffiliated investors, of which $442.0 million was floating rate with a weighted-average coupon of three-month LIBOR plus 1.67% and $16.5 million was fixed rate at 3.73%. The investments that are owned by CLO 2013-1 collateralize the CLO 2013-1 debt, and as a result, those investments are not available to the Company, its creditors or shareholders.

On December 21, 2012, the Company closed CLO 2012-1, a $412.4 million secured financing transaction maturing December 16, 2024. The Company issued $367.5 million par amount of senior secured notes to unaffiliated investors, of which $342.5 million was floating rate with a weighted-average coupon of three-month LIBOR plus 2.09% and $25.0 million was fixed rate at 2.39%. The Company also issued $21.5 million of subordinated notes to unaffiliated third party investors. CLO 2012-1’s debt is collateralized by the investments that are owned by CLO 2012-1, and as a result, those investments are not available to the Company, its creditors or shareholders.

During the three and nine months ended September 30, 2012, the Company issued $59.5 million par amount and $119.0 million par amount, respectively, of CLO 2007-1 class D notes for proceeds of $49.4 million and $94.5 million, respectively. In addition, during the nine months ended September 30, 2012, the Company issued $11.3 million par amount of CLO 2007-A class C notes for proceeds of $10.6 million.

Credit Facilities

Senior Secured Credit Facility

On November 30, 2012, the Company entered into a credit agreement for a three-year $150.0 million revolving credit facility, maturing on November 30, 2015 (the “2015 Facility”). The Company may obtain additional commitments under the 2015 Facility so long as the aggregate amount of commitments at any time does not exceed $350.0 million. The Company has the right to prepay loans under the 2015 Facility in whole or in part at any time. In connection with entering into the 2015 Facility, the Company terminated the commitments under its existing asset-based revolving credit facility. Loans under the 2015 Facility bear interest at a rate equal to, at the Company’s option, LIBOR plus 2.25% per annum, or an alternate base rate plus 1.25% per annum. The 2015 Facility contains customary covenants, including ones that require the Company to satisfy a net worth financial test and maintain certain ratios relating to leverage and consolidated total assets. In addition, the 2015 Facility contains customary negative covenants applicable to the Company. As of September 30, 2013 and December 31, 2012, the Company had no borrowings outstanding under the 2015 Facility.

Asset-Based Borrowing Facilities

On May 15, 2013, the Company’s five-year nonrecourse, asset-based revolving credit facility (the “2015 Natural Resources Facility”), maturing on November 5, 2015, was adjusted and reduced to $100.9 million, that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified oil and gas assets. The borrowing base is subject to certain caps and concentration limits customary for financings of this type. The Company has the right to prepay loans under the 2015 Natural Resources Facility in whole or in part at any time. Loans under the 2015 Natural Resources Facility bear interest at a rate equal to LIBOR plus a tiered applicable margin ranging from 1.75% to 2.75% per annum. The 2015 Natural Resources Facility contains customary covenants applicable to the Company. As of September 30, 2013 and December 31, 2012, the Company had $48.5 million and $107.8 million, respectively, of borrowings outstanding under the 2015 Natural Resources Facility.

On February 27, 2013, the Company entered into a separate credit agreement for a five-year $6.0 million non-recourse, asset-based revolving credit facility, maturing on February 27, 2018 (the “2018 Natural Resources Facility”), that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified oil and gas assets. On August 1, 2013, the 2018 Natural Resources Facility was adjusted and increased to $20.0 million. The Company has the right to prepay loans under the 2018 Natural Resources Facility in whole or in part at any time. Loans under the 2018 Natural Resources Facility bear interest at a rate equal to LIBOR plus a tiered applicable margin ranging from 1.75% to 3.25% per annum. The 2018 Natural Resources Facility contains customary covenants applicable to the Company. As of September 30, 2013, the Company had no borrowings outstanding under the 2018 Natural Resources Facility.

As of September 30, 2013 and December 31, 2012, the Company believes it was in compliance with the covenant requirements for its credit facilities.

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Convertible Debt

7.5% Convertible Senior Notes

On January 18, 2013, in accordance with the indenture relating to the Company’s $172.5 million 7.5% convertible senior notes due January 15, 2017 (“7.5% Notes”), the Company issued a conversion rights termination notice (“Termination Notice”) to holders of the 7.5% Notes whereby it terminated the right to convert the 7.5% Notes to common shares. The conversion rate as of January 18, 2013 was equal to 141.8256 common shares for each $1,000 principal amount of 7.5% Notes, plus an additional 9.2324 common shares per $1,000 principal amount to account for the make-whole premium. Holders of $172.5 million 7.5% Notes submitted their notes for conversion for which the Company satisfied by physical settlement with 26.1 million common shares.

In accordance with accounting for convertible debt instruments that may be settled in cash upon conversion, the Company had separately accounted for the liability and equity components to reflect the nonconvertible debt borrowing rate. The Company determined that the equity component of the 7.5% Notes totaled $10.0 million and was included in paid-in-capital on the Company’s consolidated balance sheet as of December 31, 2012. The remaining liability component of $166.0 million, included within convertible senior notes on the Company’s consolidated balance sheets as of December 31, 2012, was comprised of the principal $172.5 million less the unamortized debt discount of $6.5 million as of December 31, 2012. The total debt discount amortization recognized for the three and nine months ended September 30, 2012 was $0.4 million and $1.0 million, respectively, at the effective interest rate of 8.6%. For the three and nine months ended September 30, 2013, the total interest expense recognized on the 7.5% Notes was less than $0.1 million and $0.5 million, respectively. For the three and nine months ended September 30, 2012, the total interest expense recognized on the 7.5% Notes was $3.2 million and $9.7 million, respectively.

7.0% Convertible Senior Notes

During the three months ended March 31, 2012, the Company repurchased $23.1 million par amount of its 7.0% convertible senior notes due July 15, 2012 (the “7.0% Notes”). These transactions resulted in the Company recording a loss of $0.4 million and a $0.2 million write-off of unamortized debt issuance costs. On July 13, 2012, the Company repaid in full its $112.0 million of outstanding 7.0% Notes, which matured on July 15, 2012.

Senior Notes

On March 20, 2012, the Company issued $115.0 million par amount of 7.500% senior notes due March 20, 2042 (“7.500% Senior Notes”), resulting in net proceeds of $111.4 million. Interest on the 7.500% Senior Notes is payable quarterly in arrears on June 20, September 20, December 20 and March 20 of each year.

NOTE 8. DERIVATIVE INSTRUMENTS

The Company enters into derivative transactions in order to hedge its interest rate risk exposure to the effects of interest rate changes. Additionally, the Company enters into derivative transactions in the course of its portfolio management activities. The counterparties to the Company’s derivative agreements are major financial institutions with which the Company and its affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, the Company is potentially exposed to losses. The counterparties to the Company’s derivative agreements have investment grade ratings and, as a result, the Company does not anticipate that any of the counterparties will fail to fulfill their obligations.

The table below summarizes the aggregate notional amount and estimated net fair value of the derivative instruments as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013						As of December 31, 2012
	Notional			Estimated Fair Value			Notional			Estimated Fair Value
Cash Flow Hedges:
Interest rate swaps	$	485,833		$	(52,332	)	$	503,833		$	(90,618	)
Free-Standing Derivatives:
Commodity swaps	—			4,330			—			7,056
Credit default swaps—protection sold	—			—			—			19
Credit default swaps—protection purchased	(109,953		)	(1,665		)	(47,321		)	(1,140		)
Foreign exchange forward contracts	(293,457		)	(23,174		)	(338,313		)	(20,975		)
Foreign exchange options	130,207			7,931			130,207			8,277
Common stock warrants	—			4,541			—			3,318
Total rate of return swaps	—			729			—			—
Options	—			8,880			—			—
Total				$	(50,760	)				$	(94,063	)

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Cash Flow Hedges

The Company uses interest rate swaps to hedge a portion of the interest rate risk associated with its borrowings under CLO senior secured notes as well as certain of its floating rate junior subordinated notes. The Company designates these interest rate swaps as cash flow hedges. As of September 30, 2013 and December 31, 2012, the Company had interest rate swaps with notional amounts totaling $485.8 million and $503.8 million, respectively. Changes in the estimated fair value of the interest rate swaps are recorded through accumulated other comprehensive loss, with gains or losses representing hedge ineffectiveness, if any, recognized in earnings during the reporting period.

The following table presents the net gains recognized in accumulated other comprehensive loss related to derivatives in cash flow hedging relationships for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three monthsended September 30, 2013		For the three monthsendedSeptember 30, 2012		For the nine monthsended September 30, 2013		For the ninemonthsendedSeptember 30, 2012
Net gains recognized in accumulated other comprehensive loss on cash flow hedges	$	6,813	$	2,767	$	38,211	$	1,580

For all hedges where hedge accounting is being applied, effectiveness testing and other procedures to ensure the ongoing validity of the hedges are performed at least quarterly. During the three and nine months ended September 30, 2013 and 2012, the Company did not recognize any ineffectiveness in income on the condensed consolidated statements of operations from its cash flow hedges.

Free-Standing Derivatives

Free-standing derivatives are derivatives that the Company has entered into in conjunction with its investment and risk management activities, but for which the Company has not designated the derivative contract as a hedging instrument for accounting purposes. Such derivative contracts may include credit default swaps (“CDS”), foreign exchange contracts and options, interest rate swaps and commodity derivatives. Free-standing derivatives also include investment financing arrangements (total rate of return swaps) whereby the Company receives the sum of all interest, fees and any positive change in fair value amounts from a reference asset with a specified notional amount and pays interest on such notional amount plus any negative change in fair value amounts from such reference asset.

Gains and losses on free-standing derivatives are reported in net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations. Unrealized gains (losses) represent the change in fair value of the derivative instruments and are noncash items.

Commodity Derivatives

In an effort to minimize the effects of the volatility of oil, natural gas and NGL prices, the Company will from time to time enter into derivative instruments such as swap contracts to hedge its forecasted commodities sales. The Company does not designate these contracts as cash flow hedges and as such, the changes in fair value of these instruments are recorded in current period earnings.

The following table summarizes open positions as of September 30, 2013, and represents, as of such date, derivatives in place through December 31, 2016, on expected annual production volumes:

	2013		2014		2015		2016
Natural gas positions:
Fixed price swaps:
Hedged volume (MMMBtu)	1,691		5,821		4,277		1,805
Average price ($/MMBtu)	$	3.60	$	3.86	$	4.07	$	4.17
Natural gas liquid positions:
Fixed price swaps:
Hedged volume (MBbls)	48		145		—		—
Average price ($/Bbl)	$	32.05	$	27.89	$	—	$	—
Oil positions:
Fixed price swaps:
Hedged volume (MBbls)	114		626		253		—
Average price ($/Bbl)	$	101.58	$	95.05	$	89.18	$	—

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Credit Default Swaps

A CDS is a contract in which the contract buyer pays, in the case of a short position, or receives, in the case of long position, a periodic premium until the contract expires or a credit event occurs. In return for this premium, the contract seller receives a payment from or makes a payment to the buyer if there is a credit default or other specified credit event with respect to the issuer (also known as the reference entity) of the underlying credit instrument referenced in the CDS. Typical credit events include bankruptcy, dissolution or insolvency of the reference entity, failure to pay and restructuring of the obligations of the reference entity.

As of September 30, 2013 and December 31, 2012, the Company had purchased protection with a notional amount of $110.0 million and $47.3 million, respectively. The Company sells or purchases protection to replicate fixed income securities and to complement the spot market when cash securities of the referenced entity of a particular maturity are not available or when the derivative alternative is less expensive compared to other purchasing alternatives. In addition, the Company may purchase protection to hedge economic exposure to declines in value of certain credit positions. The Company purchases its protection from banks and broker dealers, other financial institutions and other counterparties.

Foreign Exchange Derivatives

The Company holds certain positions that are denominated in a foreign currency, whereby movements in foreign currency exchange rates may impact earnings if the United States dollar significantly strengthens or weakens against foreign currencies. In an effort to minimize the effects of these fluctuations on earnings, the Company will from time to time enter into foreign exchange options or foreign exchange forward contracts related to the assets denominated in a foreign currency. As of September 30, 2013 and December 31, 2012, the net contractual notional balance of our foreign exchange options and forward contracts totaled $163.3 million and $208.1 million, respectively, all of which related to certain of our foreign currency denominated corporate debt holdings.

Free-Standing Derivatives Income (Loss)

The amounts recorded in net realized and unrealized gain (loss) on derivatives and foreign exchange on the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	Three months ended September 30, 2013									Three months ended September 30, 2012
	Realized gains (losses)(1)			Unrealized gains (losses)			Total			Realized gains (losses)(1)			Unrealized gains (losses)			Total
Commodity swaps	$	(78	)	$	(3,645	)	$	(3,723	)	$	931		$	(6,738	)	$	(5,807	)
Credit default swaps	(365		)	(967		)	(1,332		)	(1,167		)	(4,385		)	(5,552		)
Foreign exchange forward contracts and options(2)	502			1,444			1,946			(1,361		)	3,884			2,523
Common stock warrants	—			(1,219		)	(1,219		)	—			734			734
Total rate of return swaps	447			729			1,176			—			—			—
Options	—			90			90			—			—			—
Net realized and unrealized gains (losses)	$	506		$	(3,568	)	$	(3,062	)	$	(1,597	)	$	(6,505	)	$	(8,102	)

(1)Includes related income and expense on the derivatives.

(2)Net of foreign exchange remeasurement gain or loss on foreign denominated assets.

	Nine months ended September 30, 2013									Nine months ended September 30, 2012
	Realized gains (losses)(1)			Unrealized gains (losses)			Total			Realized gains (losses)(1)			Unrealized gains (losses)			Total
Commodity swaps	$	1,008		$	(2,725	)	$	(1,717	)	$	3,590		$	(2,917	)	$	673
Credit default swaps	(3,526		)	552			(2,974		)	(5,764		)	2,497			(3,267		)
Foreign exchange forward contracts and options(2)	2,770			(4,929		)	(2,159		)	(396		)	(971		)	(1,367		)
Common stock warrants	—			540			540			—			1,237			1,237
Total rate of return swaps	447			729			1,176			141			—			141
Options	(91		)	213			122			—			—			—
Net realized and unrealized gains (losses)	$	608		$	(5,620	)	$	(5,012	)	$	(2,429	)	$	(154	)	$	(2,583	)

(1)Includes related income and expense on the derivatives.

(2)Net of foreign exchange remeasurement gain or loss on foreign denominated assets.

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NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of changes in accumulated other comprehensive loss were as follows (amounts in thousands):

	Three months endedSeptember 30, 2013(1)									Nine months endedSeptember 30, 2013(1)
	Net unrealized gains on available-for-sale securities			Net unrealized losses on cash flow hedges			Total			Net unrealized gains on available-for-sale securities			Net unrealized losses on cash flow hedges			Total
Beginning balance	$	16,657		$	(56,300	)	$	(39,643	)	$	17,472		$	(87,698	)	$	(70,226	)
Other comprehensive (loss) income before reclassifications	(1,871		)	6,813			4,942			(11,580		)	38,211			26,631
Amounts reclassified from accumulated other comprehensive loss(2)	5,008			—			5,008			13,902			—			13,902
Net current-period other comprehensive income	3,137			6,813			9,950			2,322			38,211			40,533
Ending balance	$	19,794		$	(49,487	)	$	(29,693	)	$	19,794		$	(49,487	)	$	(29,693	)

(1)The Company’s gross and net of tax amounts are the same.

(2)Includes an impairment charge of $5.0 million and $17.5 million for investments which were determined to be other-than-temporary for the three and nine months ended September 30, 2013, respectively. These reclassified amounts are included in net realized and unrealized gain on investments on the condensed consolidated statements of operations.

NOTE 10. COMMITMENTS & CONTINGENCIES

Commitments

As part of its strategy of investing in corporate loans, the Company commits to purchase interests in primary market loan syndications, which obligate the Company, subject to certain conditions, to acquire a predetermined interest in such loans at a specified price on a to-be-determined settlement date. Consistent with standard industry practices, once the Company has been informed of the amount of its syndication allocation in a particular loan by the syndication agent, the Company bears the risks and benefits of changes in the fair value of the syndicated loan from that date forward. In addition, the Company also commits to purchase corporate loans in the secondary market that similar to the above, the Company bears the risks and benefits of changes in the fair value from the trade date forward. As of September 30, 2013 and December 31, 2012, the Company had committed to purchase corporate loans with aggregate par amounts totaling $209.7 million and $254.2 million, respectively. In addition, the Company participates in certain contingent financing arrangements, whereby the Company is committed to provide funding of up to a specific predetermined amount at the discretion of the borrower or has entered into an agreement to acquire interests in certain assets. As of September 30, 2013 and December 31, 2012, the Company had unfunded financing commitments for corporate loans totaling $5.0 million and $9.8 million, respectively. The Company did not have any significant losses as of September 30, 2013, nor does it expect any significant losses related to those assets for which it committed to purchase and fund.

The Company participates in joint ventures and partnerships alongside KKR and its affiliates through which the Company contributes capital for assets, including development projects related to the Company’s interests in joint ventures and partnerships that hold commercial real estate and natural resources investments, as well as specialty lending focused businesses. The Company estimated these future contributions to range from approximately $290 million to $300 million as of September 30, 2013 and $203.0 million as of December 31, 2012.

Guarantees

As of September 30, 2013, the Company had investments, held alongside KKR and its affiliates, in real estate entities that were financed with non-recourse debt totaling $231.7 million. Under non-recourse debt, the lender generally does not have recourse against any other assets owned by the borrower or any related parties of the borrower, except for certain specified exceptions listed in the respective loan documents including customary “bad boy” acts. In connection with these investments, joint and several non-recourse “bad boy” guarantees were provided for losses relating solely to specified bad faith acts that damage the value of the real estate being used as collateral. The Company does not expect any related losses. As of both September 30, 2013 and December 31, 2012, the Company also had financial guarantees related to its natural resources investments totaling $17.9 million for which the Company does not expect any significant losses.

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NOTE 11. SHAREHOLDERS’ EQUITY

Preferred Shares

On January 17, 2013, the Company issued 14.95 million of Series A LLC Preferred Shares for gross proceeds of $373.8 million, and net proceeds of $362.0 million. The Series A LLC Preferred Shares trade on the New York Stock Exchange (“NYSE”) under the ticker symbol “KFN.PR” and began trading on January 28, 2013. Distributions on the Series A LLC Preferred Shares are cumulative and are payable, when, as, and if declared by the Company’s board of directors, quarterly on January 15, April 15, July 15 and October 15 of each year, beginning April 15, 2013, at a rate per annum equal to 7.375%.

Common Shares

On May 4, 2007, the Company adopted an amended and restated share incentive plan (the “2007 Share Incentive Plan”) that provides for the grant of qualified incentive common share options that meet the requirements of Section 422 of the Code, non-qualified common share options, share appreciation rights, restricted common shares and other share-based awards. The Compensation Committee of the board of directors administers the plan. Share options and other share-based awards may be granted to the Manager, directors, officers and any key employees of the Manager and to any other individual or entity performing services for the Company.

The exercise price for any share option granted under the 2007 Share Incentive Plan may not be less than 100% of the fair market value of the common shares at the time the common share option is granted. Each option to acquire a common share must terminate no more than ten years from the date it is granted. As of September 30, 2013, the 2007 Share Incentive Plan authorizes a total of 8,839,625 shares that may be used to satisfy awards under the 2007 Share Incentive Plan. On February 14, 2013, the Compensation Committee of the board of directors granted the Manager 292,009 restricted common shares subject to graded vesting over three years with the final vesting date of March 1, 2016.

The following table summarizes restricted common share transactions:

	Manager		Directors		Total
Unvested shares as of January 1, 2013	438,937		92,253		531,190
Issued	292,009		39,288		331,297
Vested	(146,312	)	(46,347	)	(192,659	)
Forfeited	—		—		—
Unvested shares as of September 30, 2013	584,634		85,194		669,828

The Company is required to value any unvested restricted common shares granted to the Manager at the current market price. The Company valued the unvested restricted common shares granted to the Manager at $10.33 per share and $10.05 per share at September 30, 2013 and 2012, respectively. There were $3.9 million and $3.5 million of total unrecognized compensation costs related to unvested restricted common shares granted as of September 30, 2013 and 2012, respectively. These costs are expected to be recognized through 2016.

The following table summarizes common share option transactions:

	Number of Options	Weighted Average Exercise Price
Outstanding as of January 1, 2013	1,932,279	$	20.00
Granted	—	—
Exercised	—	—
Forfeited	—	—
Outstanding as of September 30, 2013	1,932,279	$	20.00

As of September 30, 2013 and 2012, 1,932,279 common share options were exercisable. As of September 30, 2013, the common share options were fully vested and expire in August 2014.

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For the three and nine months ended September 30, 2013 and 2012, the components of share-based compensation expense are as follows (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Restricted common shares granted to Manager	$	690	$	778	$	2,073	$	1,577
Restricted common shares granted to certain directors	256		234		769		681
Total share-based compensation expense	$	946	$	1,012	$	2,842	$	2,258

NOTE 12. MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS

The Manager manages the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors. The Management Agreement expires on December 31 of each year, but is automatically renewed for a one-year term each December 31 unless terminated upon the affirmative vote of at least two-thirds of the Company’s independent directors, or by a vote of the holders of a majority of the Company’s outstanding common shares, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable by the Manager is not fair, subject to the Manager’s right to prevent such a termination under this clause (2) by accepting a mutually acceptable reduction of management fees. The Manager must be provided 180 days prior notice of any such termination and will be paid a termination fee equal to four times the sum of the average annual base management fee and the average annual incentive fee for the two 12-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

The Management Agreement contains certain provisions requiring the Company to indemnify the Manager with respect to all losses or damages arising from acts not constituting bad faith, willful misconduct, or gross negligence. The Company has evaluated the impact of these guarantees on its condensed consolidated financial statements and determined that they are not material.

The following table summarizes the components of related party management compensation on the Company’s condensed consolidated statement of operations, which are described in further detail below, for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Base management fees, net	$	4,314	$	6,911	$	23,500	$	21,075
CLO management fees	5,916		1,145		8,429		3,372
Incentive fees	—		17,768		22,742		31,495
Manager share-based compensation	690		778		2,073		1,577
Total related party management compensation	$	10,920	$	26,602	$	56,744	$	57,519

Base Management Fees

The Company pays its Manager a base management fee monthly in arrears. During the three and nine months ended September 30, 2013, certain related party fees received by affiliates of the Manager were credited to the Company via an offset to the base management fee (“Fee Credits”). Specifically, as described in further detail under “CLO Management Fees” below, a portion of the CLO management fees received by an affiliate of the Manager for certain of the Company’s CLOs were credited to the Company via an offset to the base management fee. For some of these CLOs, the Company holds less than 100% of the subordinated notes, with the remainder held by third parties. As a result, the amount of Fee Credits for each applicable CLO was calculated by taking the product of (x) the total CLO management fees received by an affiliate of the Manager during the period for such CLO multiplied by (y) the percentage of the subordinated notes of such CLO held by the Company. The remaining portion of the CLO management fees paid by each of these CLOs was not credited to the Company, but instead resulted in a dollar-for-dollar reduction in the interest expense paid by the Company to the third party holder of the CLO’s subordinated notes.

In addition, during the third quarter of 2013, the Company invested in a transaction that generated placement fees paid to a minority-owned affiliate of KKR. In connection with this transaction, the Manager agreed to reduce the Company’s base management fee payable to the Manager for the portion of these placement fees that were earned by KKR as a result of this minority-ownership.

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The table below summarizes the aggregate base management fees for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013			For the three months ended September 30, 2012		For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Base management fees, gross	$	9,799		$	6,911	$	29,216		$	21,075
CLO management fees credit (1)	(3,684		)	—		(3,915		)	—
Other related party fees credit	(1,801		)	—		(1,801		)	—
Total base management fees, net	$	4,314		$	6,911	$	23,500		$	21,075

(1)See “CLO Management Fees” for further discussion.

The Manager is waiving base management fees related to the $230.4 million common share offering and $270.0 million common share rights offering that occurred during the third quarter of 2007 until such time as the Company’s common share closing price on the NYSE is $20.00 or more for five consecutive trading days. Accordingly, the Manager permanently waived approximately $2.2 million of base management fees during each of the three months ended September 30, 2013 and 2012 and $6.6 million during each of the nine months ended September 30, 2013 and 2012.

CLO Management Fees

An affiliate of the Manager entered into separate management agreements with the respective investment vehicles for all of the Company’s Cash Flow CLOs and is entitled to receive fees for the services performed as collateral manager for all of these CLOs, except for CLO 2011-1. The collateral manager has the option to waive the fees it earns for providing management services for the CLO.

Fees Waived

During the three and nine months ended September 30, 2013, the collateral manager waived CLO management fees totaling $3.0 million and $18.0 million, respectively, for all CLOs, except CLO 2005-1, CLO 2007-1 and CLO 2012-1. During the three and nine months ended September 30, 2012, the collateral manager waived aggregate CLO management fees of $8.0 million and $24.4 million, respectively, for all CLOs, except for CLO 2005-1.

Fees Charged and Fee Credits

The Company recorded management fees expense for CLO 2005-1, CLO 2007-1 and CLO 2012-1 for the three and nine months ended September 30, 2013. The Company recorded management fees expense for CLO 2005-1 for the three and nine months ended September 30, 2012.

During the three and nine months ended September 30, 2013, the Manager agreed to credit the Company for a portion of the CLO management fees received by an affiliate of the Manager from CLO 2007-1 and CLO 2012-1 via an offset to the monthly base management fees payable to the Manager. As the Company owns less than 100% of the subordinated notes of these two CLOs (with the remaining subordinated notes held by third parties), the Company received a Fee Credit equal only to the Company’s pro rata share of the aggregate CLO management fees paid by these CLOs. Specifically, the amount of the reimbursement for each of these CLOs was calculated by taking the product of (x) the total CLO management fees received by an affiliate of the Manager during the period for such CLO multiplied by (y) the percentage of the subordinated notes of such CLO held by the Company. The remaining portion of the CLO management fees paid by each of these CLOs was not credited to the Company, but instead resulted in a dollar-for-dollar reduction in the interest expense paid by the Company to the third party holder of the CLO’s subordinated notes. Effective October 2013, a portion of CLO management fees received by the Manager from CLO 2007-A will also reduce the base management fees payable by the Company in the same manner described above.

The table below summarizes the aggregate CLO management fees, including the Fee Credits, for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Charged and retained CLO management fees (1)	$	2,232	$	1,145	$	4,514	$	3,372
CLO management fees credit	3,684		—		3,915		—
Total CLO management fees	$	5,916	$	1,145	$	8,429	$	3,372

(1)Represents management fees incurred by the senior and subordinated note holders of a CLO, excluding the Fee Credits received by the Company based on its ownership percentage in the CLO.

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Subordinated note holders in CLOs have the first risk of loss and conversely, the residual value upside of the transactions. When CLO management fees are paid by a CLO, the residual economic interests in the CLO transaction are reduced by an amount commensurate with the CLO management fees paid. The Company records any residual proceeds due to subordinated note holders as interest expense on the condensed consolidated statements of operations. Accordingly, the increase in CLO management fees is directly offset by a decrease in interest expense.

Incentive Fees

During the three and nine months ended September 30, 2013, the Manager earned zero and $22.7 million, respectively, of incentive fees. As of September 30, 2013, the Company had no incentive fee payable to the Manager. During the three and nine months ended September 30, 2012, the Manager earned $17.8 million and $31.5 million, respectively, of incentive fees.

Manager Share-Based Compensation

The Company recognized share-based compensation expense related to restricted common shares granted to the Manager of $0.7 million and $2.1 million, for the three and nine months ended September 30, 2013, respectively. The Company recognized share-based compensation expense related to restricted common shares granted to the Manager of $0.8 million and $1.6 million, for the three and nine months ended September 30, 2012, respectively. Refer to Note 11 to these condensed consolidated financial statements for further discussion on share-based compensation.

Reimbursable General and Administrative Expenses

Certain general and administrative expenses are incurred by the Company’s Manager on its behalf that are reimbursable to the Manager pursuant to the Management Agreement. During the three and nine months ended September 30, 2013, the Company incurred reimbursable general and administrative expenses to its Manager of $2.3 million and $5.9 million, respectively, as compared to $1.9 million and $5.8 million during the three and nine months ended September 30 2012, respectively. Expenses incurred by the Manager and reimbursed by the Company are reflected in general, administrative and directors expenses on the condensed consolidated statements of operations.

Affiliated Investments

The Company has invested in corporate loans, debt securities and other investments of entities that are affiliates of KKR. As of September 30, 2013, the aggregate par amount of these affiliated investments totaled $2.0 billion, or approximately 26% of the total investment portfolio, and consisted of 28 issuers. The total $2.0 billion in affiliated investments was comprised of $1.9 billion of corporate loans, $52.8 million of corporate debt securities and $84.3 million of equity investments, at estimated fair value. As of December 31, 2012, the aggregate par amount of these affiliated investments totaled $2.1 billion, or approximately 29% of the total investment portfolio, and consisted of 32 issuers. The total $2.1 billion in affiliated investments was comprised of $2.0 billion of corporate loans, $39.3 million of corporate debt securities and $73.8 million of equity investments, at estimated fair value.

In addition, the Company has invested in certain joint ventures and partnerships alongside KKR and its affiliates. As of September 30, 2013 and December 31, 2012, the aggregate cost amount of these interests in joint ventures and partnerships, which are included in other assets on the condensed consolidated balance sheets, totaled $319.0 million and $137.6 million, respectively.

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NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Instruments Not Carried at Estimated Fair Value

The following table presents the carrying value and estimated fair value, as well as the respective hierarchy classifications, of the Company’s financial assets and liabilities that are not carried at estimated fair value on a recurring basis as of September 30, 2013 (amounts in thousands):

	As of September 30, 2013				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash, restricted cash, and cash equivalents	$	731,674	$	731,674	$	731,674	$	—	$	—
Corporate loans, net of allowance for loan losses of $212,594 as of September 30, 2013(1)	5,684,165		5,738,480		—		5,319,139		419,341
Corporate loans held for sale(1)	312,312		313,605		—		300,178		13,427
Private equity investments, at cost(2)	405		2,621		—		—		2,621
Other assets	11,083		11,378		—		11,378		—
Liabilities:
Collateralized loan obligation secured debt	$	4,903,438	$	4,832,415	$	—	$	—	$	4,832,415
Collateralized loan obligation junior secured notes to affiliates	193,921		171,175		—		—		171,175
Credit facilities	48,489		48,489		—		—		48,489
Senior notes	362,251		394,508		394,508		—		—
Junior subordinated notes	283,517		138,073		—		—		138,073

(1)Corporate loans held for investment are carried at amortized cost net of allowance for loan losses, while corporate loans held for sale are carried at the lower of cost or estimated fair value. Refer to “Fair Value Measurements” for a table presenting the corporate loans which are measured at fair value on a non-recurring basis.

(2)Included within other assets on the condensed consolidated balance sheets.

The following table presents the carrying value and estimated fair value, as well as the respective hierarchy classifications, of the Company’s financial assets and liabilities that are not carried at estimated fair value on a recurring basis as of December 31, 2012 (amounts in thousands):

	As of December 31, 2012				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash, restricted cash, and cash equivalents	$	1,134,002	$	1,134,002	$	1,134,002	$	—	$	—
Corporate loans, net of allowance for loan losses of $223,472 as of December 31, 2012	5,783,689		5,831,218		—		5,203,763		627,455
Corporate loans held for sale(1)	128,289		195,078		—		151,327		43,751
Private equity investments, at cost(2)	405		1,635		—		—		1,635
Other assets	17,148		16,777		—		16,439		338
Liabilities:
Collateralized loan obligation secured debt	$	5,122,338	$	5,020,115	$	—	$	—	$	5,020,115
Collateralized loan obligation junior secured notes to affiliates	296,557		290,948		—		—		290,948
Credit facilities	107,789		107,789		—		—		107,789
Convertible senior notes	166,028		268,238		—		268,238		—
Senior notes	362,178		412,126		412,126		—		—
Junior subordinated notes	283,517		134,351		—		—		134,351

(1)Corporate loans held for sale are carried at the lower of cost or estimated fair value. Refer to “Fair Value Measurements” below for a table presenting the corporate loans held for sale which are measured at fair value on a non-recurring basis.

(2)Included within other assets on the condensed consolidated balance sheets.

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Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2013
Assets:
Securities:
Securities available-for-sale	$	—	$	329,425	$	38,951	$	368,376
Other securities, at estimated fair value	—		35,711		36,202		71,913
Residential mortgage-backed securities	—		—		79,386		79,386
Total securities	—		365,136		154,539		519,675
Corporate loans, at estimated fair value	—		72,114		84,481		156,595
Equity investments, at estimated fair value	46,753		33,746		110,654		191,153
Derivatives:
Foreign exchange options	—		—		8,420		8,420
Commodity swaps	—		7,464		—		7,464
Common stock warrants	2,455		—		2,086		4,541
Interest rate swaps	—		2,294		—		2,294
Foreign exchange forward contracts	—		3,016		—		3,016
Credit default swaps—protection purchased	—		4		—		4
Total rate of return swaps	—		729		—		729
Options	—		—		8,880		8,880
Total derivatives	2,455		13,507		19,386		35,348
Other assets:
Interests in joint ventures and partnerships	—		—		332,921		332,921
Other assets	—		534		—		534
Total other assets	—		534		332,921		333,455
Total	$	49,208	$	485,037	$	701,981	$	1,236,226
Liabilities:
Securities sold, not yet purchased	2,662		—		—		2,662
Derivatives:
Interest rate swaps	—		54,626		—		54,626
Foreign exchange forward contracts	—		26,190		—		26,190
Credit default swaps—protection purchased	—		1,669		—		1,669
Commodity swaps	—		3,134		—		3,134
Foreign exchange options	—		—		489		489
Total derivatives	—		85,619		489		86,108
Total	$	2,662	$	85,619	$	489	$	88,770

The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of September 30, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands). There were no liabilities measured at fair value on a non-recurring basis:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2013
Corporate loans held for sale(1)	$	—	$	167,950	$	5,120	$	173,070
Total	$	—	$	167,950	$	5,120	$	173,070

(1)As of September 30, 2013, total loans held for sale had a carrying value of $312.3 million of which $173.1 million was carried at estimated fair value and the remaining $139.2 million carried at amortized cost.

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The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2012
Assets:
Securities:
Corporate debt securities	$	—	$	370,072	$	42,221	$	412,293
Other securities, at estimated fair value	—		34,476		2,909		37,385
Residential mortgage-backed securities	—		—		83,842		83,842
Total securities	—		404,548		128,972		533,520
Corporate loans, at estimated fair value	—		19,738		16,141		35,879
Equity investments, at estimated fair value	23,790		40,085		97,746		161,621
Derivatives:
Foreign exchange options	—		—		8,562		8,562
Commodity swaps	—		8,557		—		8,557
Common stock warrants	1,744		—		1,574		3,318
Foreign exchange forward contracts	—		2,615		—		2,615
Credit default swaps—protection sold	—		19		—		19
Credit default swaps—protection purchased	—		136		—		136
Total derivatives	1,744		11,327		10,136		23,207
Other assets:
Interests in joint ventures and partnerships	—		—		142,477		142,477
Other assets	—		319		—		319
Total other assets	—		319		142,477		142,796
Total	$	25,534	$	476,017	$	395,472	$	897,023
Liabilities:
Securities sold, not yet purchased	$	1,158	$	—	$	—	$	1,158
Derivatives:
Interest rate swaps	—		90,618		—		90,618
Foreign exchange forward contracts	—		23,590		—		23,590
Credit default swaps—protection purchased	—		1,276		—		1,276
Commodity swaps	—		1,501		—		1,501
Foreign exchange options	—		—		285		285
Total derivatives	—		116,985		285		117,270
Total	$	1,158	$	116,985	$	285	$	118,428

The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands). There were no liabilities measured at fair value on a non-recurring basis:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2012
Corporate loans held for sale(1)	$	—	$	49,521	$	24,347	$	73,868
Total	$	—	$	49,521	$	24,347	$	73,868

(1)As of December 31, 2012, total loans held for sale had a carrying value of $128.3 million of which $73.9 million was carried at estimated fair value and the remaining $54.4 million carried at amortized cost.

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Level 3 Fair Value Rollforward

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the three months ended September 30, 2013 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities		Other Securities, at Estimated Fair Value			Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value			Options		Common Stock Warrants			Foreign Exchange Options, Net		Interests in Joint Ventures and Partnerships
Beginning balance as of July 1, 2013	$	37,380	$	27,872		$	82,973		$	45,936	$	100,294		$	—	$	3,561		$	5,751	$	235,024
Total gains or losses (for the period):
Included in earnings(1)	297		1,384			1,747			497		5,558			90		(1,475		)	2,180		3,739
Included in other comprehensive income	338		—			—			—		—			—		—			—		—
Transfers into Level 3(2)	—		—			—			—		—			—		—			—		—
Transfers out of Level 3(2)	—		—			—			—		—			—		—			—		—
Purchases	—		8,100			—			37,959		5,000			8,790		—			—		132,198
Sales	—		—			—			—		(198		)	—		—			—		—
Settlements	936		(1,154		)	(5,334		)	89		—			—		—			—		(38,040		)
Ending balance as of September 30, 2013	$	38,951	$	36,202		$	79,386		$	84,841	$	110,654		$	8,880	$	2,086		$	7,931	$	332,921
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	297	$	1,384		$	5,868		$	497	$	5,857		$	90	$	(1,475	)	$	2,180	$	3,739

(1)Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations.

(2)There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized level 3 inputs to determine fair value, for the nine months ended September 30, 2013 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value			Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value			Equity Investments, at Estimated Fair Value			Options		Common Stock Warrants		Foreign Exchange Options, Net			Interests in Joint Ventures and Partnerships
Beginning balance as of January 1, 2013	$	42,221		$	2,909		$	83,842		$	16,141		$	97,746		$	—	$	1,574	$	8,277		$	142,477
Total gains or losses (for the period):
Included in earnings(1)	279			2,656			7,301			(555		)	8,648			90		512		(346		)	7,646
Included in other comprehensive income	559			—			—			—			—			—		—		—			—
Transfers into Level 3(2)	—			—			—			—			—			—		—		—			—
Transfers out of Level 3(2)	—			—			—			—			—			—		—		—			—
Purchases	—			31,791			—			69,727			5,003			8,790		—		—			229,862
Sales	—			—			—			—			(198		)	—		—		—			—
Settlements	(4,108		)	(1,154		)	(11,757		)	(832		)	(545		)	—		—		—			(47,064		)
Ending balance as of September 30, 2013	$	38,951		$	36,202		$	79,386		$	84,481		$	110,654		$	8,880	$	2,086	$	7,931		$	332,291
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	279		$	2,656		$	21,565		$	(851	)	$	8,947		$	90	$	513	$	(346	)	$	7,646

(1)Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations.

(2)There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

41

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the three months ended September 30, 2012 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value		Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value		Total Rate of Return Swaps		Common Stock Warrants		Foreign Exchange Options, Net			Interests in Joint Ventures and Partnerships			Other Assets
Beginning balance as of July 1, 2012	$	68,101		$	3,104	$	87,935		$	12,831	$	122,736	$	—	$	1,864	$	8,254		$	98,101		$	—
Total gains or losses (for the period):
Included in earnings(1)	573			252		2,764			264		8,996		—		503		(920		)	3,233			—
Included in other comprehensive loss	6,058			—		—			—		—		—		—		—			—			—
Transfers into Level 3(2)	—			—		—			—		—		—		—		—			—			—
Transfers out of Level 3(2)	—			—		—			—		—		—		—		—			—			—
Purchases	—			—		—			1,650		1,913		—		—		—			11,967			—
Sales	(20,000		)	—		—			—		—		—		—		—			—			—
Settlements	(10,002		)	—		(3,829		)	196		—		—		—		—			(281		)	—
Ending balance as of September 30, 2012	$	44,730		$	3,356	$	86,870		$	14,941	$	133,645	$	—	$	2,367	$	7,334		$	113,020		$	—
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	200		$	252	$	9,073		$	264	$	8,996	$	—	$	503	$	(920	)	$	3,233		$	—

(1)Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations.

(2)There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the nine months ended September 30, 2012 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value		Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value			Total Rate of Return Swaps			Common Stock Warrants		Foreign Exchange Options, Net			Interests in Joint Ventures and Partnerships			Other Assets
Beginning balance as of January 1, 2012	$	67,233		$	2,778	$	86,479		$	—	$	150,962		$	152		$	1,266	13,394			$	—		$	567
Total gains or losses (for the period):
Included in earnings(1)	1,026			578		7,498			1,017		13,214			141			1,101		(6,060		)	751			342
Included in other comprehensive loss	12,026			—		—			—		—			—			—		—			—			—
Transfers into Level 3(2)	—			—		—			—		—			—			—		—			34,230			—
Transfers out of Level 3(2)	—			—		—			—		(34,230		)	—			—		—			—			—
Purchases	—			—		—			13,494		8,064			—			—		—			78,508			—
Sales	(24,660		)	—		—			—		(4,365		)	—			—		—			—			(706		)
Settlements	(10,895		)	—		(7,107		)	430		—			(293		)	—		—			(469		)	(203		)
Ending balance as of September 30, 2012	$	44,730		$	3,356	$	86,870		$	14,941	$	133,645		$	—		$	2,367	$	7,334		$	113,020		$	—
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	417		$	578	$	24,228		$	1,017	$	10,211		$	—		$	1,101	$	(6,060	)	$	751		$	—

(1)Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign in the condensed consolidated statements of operations.

(2)There were no transfers between Level 1 or 2. The transfers into and out of Level 3 represented the reclassification of certain assets from equity investments, at estimated fair value to interests in joint ventures and partnerships. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

42

Valuation Techniques and Inputs for Level 3 Fair Value Measurements

The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivatives, that are measured at fair value and categorized within Level 3 as of September 30, 2013 (dollar amounts in thousands):

	Balance as of September 30, 2013		Valuation Techniques(1)	Unobservable Inputs(2)	Range (Weighted Average)(3)	Impact to Valuation from an Increase in Input(4)
Assets:
Securities available-for-sale: Corporate debt securities	$	38,951	Yield Analysis	Yield	12% - 14% (13%)	Decrease
				Net leverage	6x - 7x (6x)	Decrease
				EBITDA multiple	8x - 9x (9x)	Increase
			Broker quotes	Offered quotes	70 - 105 (101)	Increase
Other securities, at estimated fair value	$	36,202	Yield Analysis	Yield	9% - 12% (11%)	Decrease
				EBITDA multiple	7x (7x)	Increase
				Illiquidity discount	5% (5%)	Decrease
Residential mortgage-backed securities	$	79,386	Discounted cash flows	Probability of default Loss severity	0% - 41% (10%) 12% - 78% (26%)	Decrease Decrease
				Constant prepayment rate	3% - 33% (16%)		(5)
Corporate loans, at estimated fair value	$	84,481	Yield Analysis	Yield Discount margin	11% - 16% (16%) 900bps-1500bps	Decrease Decrease
					(1450bps)
				Illiquidity discount	10% (10%)	Decrease
				Net leverage	5x - 15x (7x)	Decrease
				EBITDA multiple	8x - 9x (9x)	Increase
			Broker quotes	Offered quotes	11 - 38 (38)	Increase
Equity investments, at estimated fair value (6)	$	110,654	Market comparables	LTM EBITDA multiple	6x - 15x (12x)	Increase
				Forward EBITDA multiple	9x - 13x (11x)	Increase
				Illiquidity discount	5% - 15% (9%)	Decrease
			Discounted cash flows	Weighted average cost of capital	8% - 14% (11%)	Decrease
				LTM EBITDA exit multiple	7x - 11x (9x)	Increase
Common stock warrants	$	2,086	Market comparables	LTM EBITDA multiple	7x - 8x (8x)	Increase
Foreign exchange options	$	8,420	Option pricing model	Forward and spot rates	0 - 1 (1)		(7)
Interests in joint ventures and partnerships	$	332,921	Discounted cash flows	Illiquidity discount	10% - 15% (12%)	Decrease
				Weighted average cost of capital	10% - 27% (13%)	Decrease
Options	$	8,880	—	—	—		(8)
Liabilities:
Foreign exchange options	$	489	Option pricing model	Forward and spot rates	0.02 (0.02)		(7)

43

(1)For the assets that have more than one valuation technique, the Company may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. When determining the weighting ascribed to each valuation methodology, the Company considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among the investments and in certain instances, may result in up to a 100% weighting to a single methodology. Broker quotes obtained for valuation purposes are reviewed by the Company through other valuation techniques.

(2)The significant unobservable inputs used in the fair value measurement of the Company’s assets and liabilities may include the last twelve months (“LTM”) EBITDA multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a variety of factors including economic, industry and market trends and developments; market valuations of comparable companies; and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement.

(3)Weighted average amounts are based on the estimated fair values.

(4)Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

(5)The impact of changes in prepayment speeds may have differing impacts depending on the seniority of the instrument. Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6)When determining the illiquidity discount to be applied, the Company takes a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments carried at estimated fair value. The Company then evaluates such investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include the salability of the investment, whether the issuer is undergoing significant restructuring activity or similar factors, as well as characteristics about the issuer including its size and/or whether it is experiencing, or expected to experience, a significant decline in earnings. Depending on the applicability of these factors, the Company determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time the Company holds the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by the Company in its valuations.

(7)The directional change from an increase in forward and spot rates varies and is dependent on the specific option.

(8)Options were purchased on September 25, 2013 and as such, the cost approximated fair value.

44

The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivatives, that are measured at fair value and categorized within Level 3 as of December 31, 2012 (dollar amounts in thousands):

	Balance as of December 31, 2012		Valuation Techniques(1)	Unobservable Inputs(2)	Range (Weighted Average)(3)	Impact to Valuation from an Increase in Input(4)
Assets:
Securities available-for-sale: Corporate debt securities	$	42,221	Yield Analysis	Yield Discount margin	11% - 46% (16%) 1100bps - 4550bps	Decrease Decrease
					(1450bps)
				Net leverage	3x - 13x (6x)	Decrease
				Illiquidity discount	3% (3%)	Decrease
				EBITDA multiple	6x - 8x (7x)	Increase
			Broker quotes	Offered quotes	69 - 105 (88)	Increase
Other securities, at estimated fair value	$	2,909	Yield Analysis	Yield	10% (10%)	Decrease
Residential mortgage-backed securities	$	83,842	Discounted cash flows	Probability of default Loss severity	0% - 21% (6%) 18% - 80% (30%)	Decrease Decrease
				Constant prepayment rate	1% - 35% (13%)		(5)
Corporate loans, at estimated fair value	$	16,141	Yield Analysis	Illiquidity discount Net leverage	15% (15%) 8x - 9x (9x)	Decrease Decrease
				EBITDA multiple	9x - 10x (10x)	Increase
			Broker quotes	Offered quotes	8 - 40 (39)	Increase
Equity investments, at estimated fair value (6)	$	97,746	Market comparables	LTM EBITDA multiple	7x - 12x (10x)	Increase
				Forward EBITDA multiple	6x - 12x (10x)	Increase
			Discounted cash flows	Weighted average cost of capital	6% - 16% (10%)	Decrease
				LTM EBITDA exit multiple	7x - 12x (9x)	Increase
Common stock warrants	$	1,574	Market comparables	LTM EBITDA multiple	7x (7x)	Increase
				Forward EBITDA multiple	7x (7x)	Increase
				Illiquidity discount	15% (15%)	Decrease
			Discounted cash flows	Weighted average cost of capital	12% (12%)	Decrease
				LTM EBITDA exit multiple	7x (7x)	Increase
Foreign exchange options	$	8,562	Option pricing model	Forward and spot rates	0 - 2 (1)		(7)
Interests in joint ventures and partnerships	$	142,477	Discounted cash flows	Illiquidity discount	10% - 15% (10%)	Decrease
				Weighted average cost of capital	13% - 30% (18%)	Decrease
Liabilities:
Foreign exchange options	$	285	Option pricing model	Forward and spot rates	0.02 (0.02)		(7)

(1)For the assets that have more than one valuation technique, the Company may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. When determining the weighting ascribed to each valuation methodology, the Company considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among the investments and in certain instances, may result in up to a 100% weighting to a single methodology. Broker quotes obtained for valuation purposes are reviewed by the Company through other valuation techniques.

(2)The significant unobservable inputs used in the fair value measurement of the Company’s assets and liabilities may include the last twelve months (“LTM”) EBITDA multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a variety of factors including economic, industry and market trends and developments; market valuations of comparable companies; and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement.

(3)Weighted average amounts are based on the estimated fair values.

(4)Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

(5)The impact of changes in prepayment speeds may have differing impacts depending on the seniority of the instrument. Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6)When determining the illiquidity discount to be applied, the Company takes a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments carried at estimated fair value. The Company then evaluates such investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include the salability of the investment, whether the issuer is undergoing significant restructuring activity or similar factors, as well as characteristics about the issuer including its size and/or whether it is experiencing, or expected to experience, a significant decline in earnings. Depending on the applicability of these factors, the Company determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time the Company holds the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by the Company in its valuations.

(7)The directional change from an increase in forward and spot rates varies and is dependent on the specific option.

45

NOTE 14. SEGMENT REPORTING

Operating segments are defined as components of a company in which separate financial information is available and reviewed by the chief operating decision maker or group in determining how to allocate resources and assessing performance. The Company operates its business through multiple reportable segments. Effective September 30, 2012, based on the growing significance of natural resources, the Company changed the basis of presentation from reporting solely the credit (“Credit”) and other segments (“Other”) to reporting Credit, natural resources (“Natural Resources”) and Other. Prior period balances have been reclassified for comparative purposes.

The Company’s segments are differentiated primarily by their investment focuses. The Credit segment consists primarily of below investment grade corporate debt comprised of senior secured and unsecured loans, mezzanine loans, private and public equity investments, and distressed and stressed debt securities. The Natural Resources segment, which was previously included within Other, consists of non-operated working and overriding royalty interests in oil and natural gas properties. The Other segment includes all other portfolio holdings, consisting solely of commercial real estate. The segments currently reported are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by the Company.

The Company evaluates the performance of its segments based on several net income components. Net income includes (i) revenues, (ii) related investment costs and expenses, (iii) other income (loss), which is comprised primarily of unrealized and realized gains and losses on investments and derivatives, and (iv) other expenses, including related party management compensation and general and administrative expenses. Certain corporate assets and expenses that are not directly related to the individual segments, including interest expense and related costs on borrowings, base management fees and professional services are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period-end. Certain other corporate assets and expenses, including prepaid insurance, incentive fees, insurance expenses, directors’ expenses and share-based compensation expense are not allocated to individual segments in the Company’s assessment of segment performance. Collectively, these items are included as reconciling items between reported segment amounts and consolidated totals.

The following table shows data of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

For the three months ended	Credit				Natural Resources						Other					Reconciling Items(1)						Total Consolidated
September 30	2013		2012		2013			2012			2013		2012			2013			2012			2013		2012
Total revenues	$	96,243	$	121,808	$	32,446		$	21,487		$	13	$	39		$	—		$	—		$	128,702	$	143,334
Total investment costs and expenses	55,253		51,681		22,386			19,120			238		99			—			—			77,877		70,900
Total other income (loss)	6,969		78,258		(3,437		)	(5,215		)	2,694		—			—			—			6,226		73,043
Total other expenses	14,155		11,302		1,269			2,025			116		49			1,607			19,820			17,147		33,196
Income tax expense	9		316		—			—			9		1			—			—			18		317
Net income (loss)	$	33,795	$	136,767	$	5,354		$	(4,873	)	$	2,344	$	(110	)	$	(1,607	)	$	(19,820	)	$	39,886	$	111,964

For the nine months ended	Credit					Natural Resources						Other					Reconciling Items(2)						Total Consolidated
September 30	2013		2012			2013			2012			2013		2012			2013			2012			2013		2012
Total revenues	$	320,769	$	377,517		$	84,118		$	44,262		$	1,509	$	39		$	—		$	—		$	406,396	$	421,818
Total investment costs and expenses	162,097		204,443			61,355			41,179			667		185			—			—			224,119		245,807
Total other income (loss)	132,853		170,505			(918		)	(1,636		)	6,015		—			(20,269		)	(445		)	117,681		168,424
Total other expenses	43,151		35,852			3,698			4,638			484		92			27,837			36,184			75,170		76,766
Income tax expense (benefit)	420		(3,549		)	—			—			14		1			—			—			434		(3,548		)
Net income (loss)	$	247,954	$	311,276		$	18,147		$	(3,191	)	$	6,359	$	(239	)	$	(48,106	)	$	(36,629	)	$	224,354	$	271,217

(1)Consists of certain expenses not allocated to individual segments including incentive fees of zero and $17.8 million for the three months ended September 30, 2013 and 2012, respectively. The remaining reconciling items include insurance expenses, directors’ expenses and share-based compensation expense.

(2)Consists of certain expenses not allocated to individual segments including incentive fees of $22.7 million and $31.5 million for the nine months ended September 30, 2013 and 2012, respectively and losses on restructuring and extinguishment of debt of $20.3 million and $0.4 million for the nine months ended September 30, 2013 and 2012, respectively. The remaining reconciling items include insurance expenses, directors’ expenses and share-based compensation expense.

The following table shows total assets of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	Credit				Natural Resources				Other				Reconciling Items				Total Consolidated
As of	September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
Total assets	$	7,823,309	$	7,904,116	$	483,546	$	399,225	$	163,940	$	53,742	$	1,196	$	1,796	$	8,471,991	$	8,358,879

46

NOTE 15. SUBSEQUENT EVENTS

On October 23, 2013, the Company’s board of directors declared a cash distribution for the quarter ended September 30, 2013 on the Company’s common shares of $0.22 per common share. The distribution is payable on November 20, 2013 to common shareholders of record as of the close of business on November 6, 2013.

On September 24, 2013, the Company’s board of directors declared a cash distribution of $0.460938 per share on its Series A LLC Preferred Shares. The distribution was paid on October 15, 2013 to preferred shareholders as of the close of business on October 8, 2013.

47

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except where otherwise expressly stated or the context suggests otherwise, the terms “we,” “us” and “our” refer to KKR Financial Holdings LLC and its subsidiaries.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Certain information contained in this Quarterly Report on Form 10-Q constitutes “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, that are based on our current expectations, estimates and projections. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. The words “believe,” “anticipate,” “intend,” “aim,” “expect,” “strive,” “plan,” “estimate,” and “project,” and similar words identify forward-looking statements. Such statements are not guarantees of future performance, events or results and involve potential risks and uncertainties. Accordingly, actual results and the timing of certain events could differ materially from those addressed in forward-looking statements due to a number of factors including, but not limited to, changes in interest rates and market values, financing and capital availability, changes in prepayment rates, general economic and political conditions and events, changes in market conditions, particularly in the global fixed income, credit and equity markets, the impact of current, pending and future legislation, regulation and legal actions, and other factors not presently identified. Other factors that may impact our actual results are discussed under “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K filed with the Securities Exchange Commission, or the SEC, on February 28, 2013. We do not undertake, and specifically disclaim, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except for as required by federal securities laws.

EXECUTIVE OVERVIEW

We are a specialty finance company with expertise in a range of asset classes. Our core business strategy is to leverage the proprietary resources of our manager with the objective of generating both current income and capital appreciation by deploying capital to our 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. Our 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 we hold are typically purchased via assignment or participation in the primary or secondary market.

The majority of our 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 our investments in corporate debt. The senior secured debt issued by the CLO transactions is primarily owned by unaffiliated third party investors and we own the majority of the subordinated notes in the CLO transactions. Our CLO transactions consist of eight CLO transactions, KKR Financial CLO 2005-1, Ltd. (“CLO 2005-1”), KKR Financial CLO 2005-2, Ltd. (“CLO 2005-2”), KKR Financial CLO 2006-1, Ltd. (“CLO 2006-1”), KKR Financial CLO 2007-1, Ltd. (“CLO 2007-1”), KKR Financial CLO 2007-A, Ltd. (“CLO 2007-A”), KKR Financial CLO 2011-1, Ltd. (“CLO 2011-1”), KKR Financial CLO 2012-1, Ltd. (“CLO 2012-1”) and KKR Financial CLO 2013-1, Ltd. (“CLO 2013-1”) (collectively the “Cash Flow CLOs”). We execute our core business strategy through our majority-owned subsidiaries, including CLOs.

We are a Delaware limited liability company and were organized on January 17, 2007. We are the successor to KKR Financial Corp., a Maryland corporation. Our common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the symbol “KFN”. We intend to continue to operate so that we qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation.

We are managed by KKR Financial Advisors LLC (our “Manager”), a wholly- owned subsidiary of KKR Asset Management LLC (“KAM”), pursuant to a management agreement (the “Management Agreement”). KAM is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P. (“KKR”).

Business Environment

The third quarter of 2013 saw continued price appreciation in the credit market, but at a restrained pace compared to the same period in the prior year. Earlier in the year, the United States Federal Reserve Chairman had hinted that the central bank would begin tapering its monthly purchase of approximately $85 billion of bonds. However, on September 18, 2013, the Federal Reserve announced its plans to continue its bond-buying strategy at the same pace. The Federal Reserve ultimately made its decision based on its evaluation of the state of the economy, with both growth and inflation running below expectations. As a result of the extended bond buying program, the money supply from the central banks is expected to remain uninterrupted in a continued effort to keep interest rates low. However, the market optimism this helped generate was dampened by the political stalemate in Washington around budget spending, which led to a government shutdown from October 1, 2013 through October 16, 2013, and increased market concern the last few days of the third quarter.

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The S&P/LSTA Loan Index posted 1.2% for the third quarter of 2013 (as compared to 3.4% for the third quarter of 2012) and 3.5% for the nine months ended September 30, 2013 (as compared to 8.1% for the nine months ended September 30, 2012), while the Merrill Lynch High Yield Master II index posted 2.3% for the third quarter of 2013 (as compared to 4.6% for the third quarter of 2012) and 3.8% for the nine months ended September 30, 2013 (as compared to 12.0% for the nine months ended September 30, 2012). During the third quarter of 2013, interest rates fell from the same period in 2012. The average three-month London interbank offered rate (“LIBOR”) rate decreased to 0.26% for the three months ended September 30, 2013 from 0.43% for the three months ended September 30, 2012. In order to help compensate for the low interest rates, consistent with the past few quarters, we saw the majority of leveraged loans offering an income premium, or LIBOR floor. As of September 30, 2013, 58.7% of our floating corporate debt portfolio had a weighted average LIBOR floor of 1.2% compared to 51.6% with a weighted average floor of 1.4% as of December 31, 2012 and 46.2% with a weighted average floor of 1.4% as of September 30, 2012.

In addition to our financial assets consisting primarily of bank loans and high yield bonds, which are impacted by factors such as LIBOR, we hold oil and natural gas assets, which are impacted by the relevant commodity prices. Commodity price volatility impacts our net income through total revenues and net realized and unrealized gains and losses on our commodity swaps. In addition, revenue earned on our oil and natural gas properties are dependent on volumes produced. The Henry Hub spot natural gas price increased to $3.50 per million British thermal units (“MMBtu”) as of September 30, 2013, from $3.02 per MMBtu as of September 28, 2012. Separately, the WTI Cushing crude oil spot price increased to $102.36 per barrel (“Bbl”) as of September 30, 2013, from $92.18 per Bbl as of September 28, 2012.

Summary of Results

Our net income available to common shareholders for the three months ended September 30, 2013 totaled $33.0 million (or $0.16 per diluted common share), as compared to net income of $112.0 million (or $0.61 per diluted common share), for the three months ended September 30, 2012. Our net income available to common shareholders for the nine months ended September 30, 2013 totaled $203.8 million (or $1.01 per diluted common share), as compared to net income of $271.2 million (or $1.48 per diluted common share), for the nine months ended September 30, 2012. Additional discussion around our results, as well as the components of net income for our reportable segments for the three and nine months ended September 30, 2013 and 2012 are detailed further below under “Results of Operations.”

Book value per common share increased $0.11 to $10.42 as of September 30, 2013 from $10.31 as of December 31, 2012, and increased $0.01 from $10.41 as of June 30, 2013. The increase in book value per common share from June 30, 2013 to September 30, 2013 was attributable to the earnings for the third quarter of 2013 of $0.16 per common share and a decrease in accumulated other comprehensive loss of $0.05 per common share, partially offset by the distribution to shareholders during the third quarter of 2013 of $0.21 per common share.

Cash Distributions to Shareholders

On October 23, 2013, our board of directors declared a cash distribution for the quarter ended September 30, 2013 on our common shares of $0.22 per common share. The distribution is payable on November 20, 2013 to common shareholders of record as of the close of business on November 6, 2013.

On September 24, 2013, our board of directors declared a cash distribution of $0.460938 per share on our 7.375% Series A LLC Preferred Shares (“Series A LLC Preferred Shares”). The distribution was paid on October 15, 2013 to preferred shareholders as of the close of business on October 8, 2013.

The amount and timing of our distributions to our common and preferred shareholders, including any special distributions to our common shareholders, is determined by our board of directors and is based upon a review of various factors including current market conditions, our liquidity needs, legal and contractual restrictions on the payment of distributions, including those under the terms of our preferred shares which would impact common shareholders, the amount of ordinary taxable income or loss earned by us, gains or losses recognized by us on the disposition of assets and our liquidity needs. For this purpose, we will generally determine gains or losses based upon the price we paid for those assets.

We note, however, because of the tax rules applicable to partnerships, the gains or losses recognized by a common shareholder on the sale of assets held by us may be higher or lower depending upon the purchase price the shareholder paid for our common shares. Holders of Series A LLC Preferred Shares will not be allocated any gains or loss from any sale of our assets.

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Shareholders may have taxable income or tax liability attributable to our shares for a taxable year that is greater than our cash distributions for such taxable year. See “Non-Cash ‘Phantom’ Taxable Income” below for further discussion about taxable income allocable to holders of our shares. We may not declare or pay distributions on our common shares unless all accrued distributions have been declared and paid, or set aside for payment, on our Series A LLC Preferred Shares.

Funding Activities

CLOs

On September 27, 2013, we amended the CLO 2011-1 senior loan agreement (the “CLO 2011-1 Agreement”) to upsize the transaction by $300.0 million, of which CLO 2011-1 is now able to borrow up to an incremental $225.0 million. Under the amended CLO 2011-1 Agreement, CLO 2011-1 matures on August 15, 2020 and borrowings under the CLO 2011-1 Agreement bear interest at a rate of the three-month LIBOR plus 1.35%.

Consolidation

Our Cash Flow CLOs are all variable interest entities (“VIEs”) that we consolidate as we have determined we have the power to direct the activities that most significantly impact these entities’ economic performance and we have both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities.

As our condensed consolidated financial statements in this Quarterly Report on Form 10-Q are presented to reflect the consolidation of the Cash Flow CLOs we hold investments in, the information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the Cash Flow CLOs on a consolidated basis, which is consistent with the disclosures in our condensed consolidated financial statements.

Non-Cash “Phantom” Taxable Income

We intend to continue to operate so that we qualify, for United States federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. Holders of our shares are subject to United States federal income taxation and generally other taxes, such as state, local and foreign income taxes, on their allocable share of our taxable income, regardless of whether or when they receive cash distributions. In addition, certain of our investments, including investments in foreign corporate subsidiaries, CLO issuers (which are treated as partnerships, disregarded entities or foreign corporations for United States federal income tax purposes), partnerships generally and debt securities, may produce taxable income without corresponding distributions of cash to us or may produce taxable income prior to or following the receipt of cash relating to such income. In addition, we have recognized and may recognize in the future cancellation of indebtedness income upon the retirement of our debt at a discount. We generally allocate our taxable income and loss using a monthly convention, which means that we determine our taxable income and losses for the taxable year to be allocated to our shares and then prorate that amount on a monthly basis. If the amount of cash distributed to our Series A LLC Preferred Shares in any year exceeds our gross ordinary income for such year, additional gross ordinary income will be allocated to the Series A LLC Preferred Shares in future years until such excess is eliminated. Consequently, in some taxable years, holders of our shares may recognize taxable income in excess of our cash distributions. Furthermore, even if we did not pay cash distributions with respect to a taxable year, holders of our common shares may still have a tax liability attributable to their allocation of our taxable income from us during such year.

Investment Portfolio

Overview

Our core business strategy is to leverage the proprietary resources of our Manager with the objective of generating both current income and capital appreciation by deploying capital to different strategies, which as of September 30, 2013, consisted of the following:

·Bank loans and high yield: We deploy capital to this strategy primarily through our CLO subsidiaries. This strategy primarily consists of senior secured corporate loans and debt securities, but also includes second lien, unsecured and subordinated corporate loans and debt securities.

·Natural resources: Our natural resources strategy primarily consists of deploying capital to oil and gas opportunities by acquiring non-operated working interests in conventional and unconventional areas, acquiring mineral and overriding royalty interests in both producing properties and unconventional resource developments (i.e. emerging shale plays) and deploying capital to private equity, joint venture and partnership opportunities focused on the oil and gas sector.

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·Special situations: Special situations opportunities may take the form of debt and/or equity and generally consist of deploying capital to deeply discounted secondary market opportunities, debtor-in-possession and exit facilities, rescue financing transactions and other distressed opportunities.

·Mezzanine: Mezzanine opportunities generally represent the private debt instruments located in the middle of a company’s capital structure, senior to common or preferred equity but subordinate to senior secured debt. Generally, mezzanine securities take the form of privately negotiated subordinated debt, and, to a lesser extent, senior notes or preferred stock, with some form of equity participation either through common or preferred stock, options or warrants.

·Commercial real estate: Our commercial real estate strategy consists of deploying capital to domestic and foreign opportunities through debt or equity interests, as well as participation in joint ventures and partnerships, in commercial real estate properties and fixed income instruments.

·Private equity: Our private equity strategy consists of deploying capital to private equity opportunities primarily on a side-by-side basis with KKR’s private equity funds. Our private equity strategy also consists of specialty lending opportunities where we may own minority or majority interests in specialty lending focused businesses.

Refer to “Results of Operations—Investment Portfolio” below for a reconciliation of these six core strategies, which differ from our reportable segments, to the line items on our condensed consolidated balance sheets.

We currently expect future capital deployment to be focused on our credit-oriented strategies, consisting of the following: bank loans and high yield primarily through CLO subsidiaries; opportunistic credit, which consists primarily of special situations and mezzanine opportunities; and equity interests in specialty lending businesses.  We currently expect that capital deployment outside of these strategies, for example in natural resources and real estate, will generally be limited to funding our existing positions rather than incremental opportunities.

The majority of our existing investments are held through CLO transactions that are managed by an affiliate of our Manager and for which we own the majority, and in some cases all, of the residual economic interests in the transaction through the subordinated notes in the transaction. As of September 30, 2013, our Cash Flow CLOs, which were structured as financing vehicles engaged in holding primarily corporate debt investments, held $6.5 billion par amount or $6.2 billion estimated fair value of corporate debt investments. Our corporate debt investments held through our Cash Flow CLOs consist of the following as of September 30, 2013:

·Corporate loans: Corporate loans consist of bank loans that are held through our CLOs with an aggregate par value of $6.1 billion and estimated fair value of $5.8 billion. Corporate loans held through our CLO transactions have a weighted average coupon of 4.6%, of which 99.0% of the corporate loans are floating rate with a weighted average coupon spread to LIBOR of 3.7%. The remaining 1.0% are fixed rate with a weighted average coupon of 7.3%.

·Corporate debt securities: Corporate debt securities consist of high yield bonds held through our CLOs with an aggregate par amount of $343.8 million and estimated fair value of $327.2 million. Corporate debt securities held through our CLO transactions have a weighted average coupon of 8.2%, of which 96.4% of the corporate debt securities are fixed rate with a weighted average coupon of 8.4%. The remaining 3.6% are floating rate with a weighted average coupon spread to LIBOR of 2.2%.

Weighted average coupon and coupon spreads are calculated based on par values. Fixed and floating percentages are also calculated based on par values.

In addition to the corporate debt portfolio, we hold two pay-fixed, receive-variable interest rate swaps through certain of our CLOs. These interest rate derivatives consist of swaps to hedge a portion of the interest rate risk associated with our borrowings under the CLO senior secured notes. As of September 30, 2013, the contractual notional balance of our amortizing interest rate swaps was $360.8 million.

As of September 30, 2013, these Cash Flow CLOs had aggregate secured debt outstanding totaling $4.9 billion held by unaffiliated third parties and aggregate junior secured notes outstanding totaling $193.9 million held by an affiliate of our Manager. In CLO transactions, subordinated notes effectively represent the equity in such transactions as they have the first risk of loss and conversely, the residual value upside of the transactions. We hold the majority or all of the subordinated notes in each of the Cash Flow CLOs and we consolidate all of the Cash Flow CLOs. All income and losses related to the assets in these Cash Flow CLOs are reflected on our condensed consolidated statement of operations.

An affiliate of our Manager has entered into separate management agreements with our Cash Flow CLOs and is entitled to receive fees for the services performed as collateral manager. The indentures governing the CLO transactions stipulate the reinvestment period during which the collateral manager can generally sell or buy assets at its discretion and can reinvest principal proceeds into new assets. CLO 2007-A, CLO 2005-1 and CLO 2005-2 are no longer in their reinvestment periods. CLO 2006-1 ended its reinvestment period in the third quarter of 2012. As a result, principal proceeds from the assets held in each of these transactions are generally used to amortize the

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balance of senior notes outstanding. During the three and nine months ended September 30, 2013, an aggregate $190.8 million and $697.1 million, respectively, of original CLO 2007-A, CLO 2005-1, CLO 2005-2 and CLO 2006-1 senior notes were repaid. CLO 2007-1, CLO 2012-1 and CLO 2013-1 will end their reinvestment periods during May 2014, December 2016 and July 2017, respectively. CLO 2011-1 does not have a reinvestment period and all principal proceeds from holdings in CLO 2011-1 will be used to amortize the transaction. During the three and nine months ended September 30, 2013, $31.7 million and $77.2 million, respectively, of original CLO 2011-1 senior notes were repaid. Accordingly, absent any new CLO transactions that we may enter into, our total investments held through CLOs will continue to decline as investments are paid down or paid off once the reinvestment period ends. In addition, pursuant to the terms of the indentures governing our CLO transactions, we have the ability to call our CLO transactions after the end of the respective non-call periods.

On an unconsolidated basis, which reflects our interests in our CLO subsidiaries as notes versus actual corporate loans and high yield securities on a consolidated basis, our investment portfolio primarily consists of the following holdings as of September 30, 2013:

·CLO note holdings: We hold $1.2 billion par amount and $1.3 billion estimated fair value of mezzanine and subordinated notes in our eight Cash Flow CLO transactions. As our Cash Flow CLOs are consolidated under accounting principles generally accepted in the United States of America (“GAAP”), these holdings are not reflected on our condensed consolidated balance sheets as the assets and liabilities of our CLO subsidiaries are consolidated and our ownership interests in the Cash Flow CLOs are eliminated for consolidation.

·Corporate loans: Our corporate loans consist of bank loans that are held outside of our CLO transactions. These corporate loans have an aggregate par value of $157.4 million and estimated fair value of $139.8 million. These loans have a weighted average coupon of 5.1%, and all are floating rate with a weighted average coupon spread to LIBOR of 4.1%. In addition, we hold equity instruments with an estimated fair value of $26.8 million, which were restructured from debt instruments to equity.

·Corporate debt securities: Our corporate debt securities consist of high yield bonds. These corporate debt securities have an aggregate par value of $41.3 million and estimated fair value of $41.0 million. These debt securities have a weighted average coupon of 6.4% and include one fixed rate corporate debt security with a coupon of 13%, one zero-coupon corporate debt security and one floating rate corporate debt security with a coupon spread to LIBOR of 15%.

·Natural resources: Our natural resources holdings consist of (i) non-operated oil and gas working interests in proved developed and proved undeveloped properties and unproved acreage with a carrying amount of $335.3 million, partially financed with $48.5 million borrowed under a non-recourse, asset-based credit facility, (ii) overriding royalty interests with a carrying amount of $42.9 million, and (iii) private equity and interests in joint ventures and partnerships focused on the oil and gas sector with an aggregate cost basis of $92.8 million and an estimated fair value of $90.1 million.

·Special situations: Our special situations holdings consist of (i) $293.8 million par amount of debt investments with an $223.6 million amortized cost and estimated fair value of $242.1 million, (ii) $64.7 million aggregate cost of equity, including warrants and interests in joint ventures and partnerships with an estimated fair value of $71.4 million, and (iii) $11.3 million aggregate cost of other investments with an estimated fair value of $11.9 million. The $293.8 million par amount of debt investments has a weighted average coupon of 9.6% and includes one zero-coupon corporate debt security.

·Mezzanine: Our mezzanine holdings consist of (i) $65.0 million par amount of debt with an estimated fair value of $65.6 million and (ii) $6.3 million aggregate cost of equity with an estimated fair value of $8.4 million. The $65.0 million par amount of mezzanine debt is all floating rate with a weighted average coupon of 15.3%.

·Commercial real estate: Our commercial real estate holdings consist of investments with a carrying value of $156.7 million.

·Private equity: Our private equity holdings, excluding those related to the oil and gas sector, have an aggregate cost basis of $150.0 million with an estimated fair value of $172.6 million.

·Residential mortgage-backed securities (“RMBS”): Our RMBS have an aggregate par amount of $126.3 million with an estimated fair value of $79.4 million.

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CRITICAL ACCOUNTING POLICIES

Our condensed consolidated financial statements are prepared by management in conformity with GAAP. Our significant accounting policies are fundamental to understanding our financial condition and results of operations because some of these policies require that we make significant estimates and assumptions that may affect the value of our assets or liabilities and financial results. We believe that certain of our policies are critical because they require us to make difficult, subjective, and complex judgments about matters that are inherently uncertain. We have reviewed these critical accounting policies with our board of directors and our audit committee.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets generally included in this category are equity securities listed in active markets.

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value and certain financial instruments classified as derivatives.

Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value, RMBS, and certain interests in joint ventures and partnerships and certain financial instruments classified as derivatives.

A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which we recognize at the end of the reporting period.

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Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that we and others are willing to pay for an asset. Ask prices represent the lowest price that we and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets our best estimate of fair value.

Depending on the relative liquidity in the markets for certain assets, we may transfer assets to Level 3 if we determine that observable quoted prices, obtained directly or indirectly, are not available. The valuation techniques used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.

Corporate Debt Securities and Corporate Loans, at Estimated Fair Value:  Corporate debt securities and corporate loans, at estimated fair value are initially valued at transaction price and are subsequently valued using market data for similar instruments (e.g., recent transactions or broker quotes), comparisons to benchmark derivative indices or valuation models. Valuation models are based on yield analysis techniques, where the key inputs are based on relative value analyses, which incorporate similar instruments from similar issuers. In addition, an illiquidity discount is applied where appropriate.

Equity Investments, at Estimated Fair Value:  Equity investments, at estimated fair value, are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on market and income (discounted cash flow) approaches, in which various internal and external factors are considered. Factors include key financial inputs and recent public and private transactions for comparable investments. Key inputs used for the discounted cash flow approach include the weighted average cost of capital and assumed inputs used to calculate terminal values, such as earnings before interest, taxes, depreciation and amortization (“EBIDTA”) exit multiples. The fair value recorded for a particular investment will generally be within the range suggested by the two approaches. Upon completion of the valuations conducted, an illiquidity discount is applied where appropriate.

Interests in Joint Ventures and Partnerships:  Interests in joint ventures and partnerships include certain equity investments related to the oil and gas and commercial real estate sectors. Interests in joint ventures and partnerships are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on an income (discounted cash flow) approach, in which various internal and external factors are considered and key inputs include the weighted average cost of capital. In addition, an illiquidity discount is applied where appropriate.

Over-the-counter (“OTC”) Derivative Contracts:  OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit standing of reference entities, and equity prices. OTC derivatives are initially valued using quoted market prices, if available, or models using a series of techniques, including closed-form analytic formulae, such as the Black-Scholes option-pricing model, and/or simulation models in the absence of quoted market prices. Many pricing models employ methodologies that have pricing inputs observed from actively quoted markets, as is the case for generic interest rate swap and option contracts.

Residential Mortgage-Backed Securities at Estimated Fair Value:  RMBS are initially valued at transaction price and are subsequently valued using a third party valuation servicer. The most significant inputs to the valuation of these instruments are default and loss expectations and constant prepayment rates.

Share-Based Compensation

We account for share-based compensation issued to members of our board of directors and our Manager using the fair value based methodology in accordance with GAAP. We do not have any employees, although we believe that members of our board of directors are deemed to be employees for purposes of interpreting and applying accounting principles relating to share-based compensation. We record as compensation costs the restricted common shares that we issued to members of our board of directors at estimated fair value as of the grant date and we amortize the cost into expense over the three-year vesting period using the straight-line method. We record compensation costs for restricted common shares and common share options that we issued to our Manager at estimated fair value as of the grant date and we remeasure the amount on subsequent reporting dates to the extent the awards have not vested. Unvested restricted common shares are valued using observable secondary market prices. Unvested common share options are valued using the Black-Scholes model and assumptions based on observable market data for comparable companies. We amortize compensation expense related to the restricted common shares and common share options that we granted to our Manager using the graded vesting attribution method.

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Because we remeasure the amount of compensation costs associated with the unvested restricted common shares and unvested common share options that we issued to our Manager as of each reporting period, our share-based compensation expense reported in our condensed consolidated financial statements will change based on the estimated fair value of our common shares and this may result in earnings volatility. For the three and nine months ended September 30, 2013, share-based compensation totaled $0.9 million and $2.8 million, respectively. As of September 30, 2013, a $1 increase in the price of our common shares would have increased our future share-based compensation expense by approximately $0.6 million and this future share-based compensation expense would be recognized over the remaining vesting periods of our outstanding restricted common shares. As of September 30, 2013, the common share options were fully vested and expire in August 2014. As of September 30, 2013, future unamortized share-based compensation totaled $3.9 million, of which $0.9 million, $2.2 million and $0.8 million will be recognized in 2013, 2014 and beyond, respectively.

Accounting for Derivative Instruments and Hedging Activities

We recognize all derivatives on our condensed consolidated balance sheets at estimated fair value. On the date we enter into a derivative contract, we designate and document each derivative contract as one of the following at the time the contract is executed: (i) a hedge of a recognized asset or liability (“fair value” hedge); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (iii) a hedge of a net investment in a foreign operation; or (iv) a derivative instrument not designated as a hedging instrument (“free-standing derivative”). For a fair value hedge, we record changes in the estimated fair value of the derivative instrument and, to the extent that it is effective, changes in the fair value of the hedged asset or liability in the current period earnings in the same financial statement category as the hedged item. For a cash flow hedge, we record changes in the estimated fair value of the derivative to the extent that it is effective in accumulated other comprehensive loss and subsequently reclassify these changes in estimated fair value to net income in the same period(s) that the hedged transaction affects earnings. The effective portion of the cash flow hedges is recorded in the same financial statement category as the hedged item. For free-standing derivatives, we report changes in the fair values in other income.

We formally document at inception our hedge relationships, including identification of the hedging instruments and the hedged items, our risk management objectives, strategy for undertaking the hedge transaction and our evaluation of effectiveness of our hedged transactions. Periodically, we also formally assess whether the derivative designated in each hedging relationship is expected to be and has been highly effective in offsetting changes in estimated fair values or cash flows of the hedged item using either the dollar offset or the regression analysis method. If we determine that a derivative is not highly effective as a hedge, we discontinue hedge accounting.

We are not required to account for our derivative contracts using hedge accounting as described above. If we decide not to designate the derivative contracts as hedges or if we fail to fulfill the criteria necessary to qualify for hedge accounting, then the changes in the estimated fair values of our derivative contracts would affect periodic earnings immediately potentially resulting in the increased volatility of our earnings. The qualification requirements for hedge accounting are complex and as a result, we must evaluate, designate, and thoroughly document each hedge transaction at inception and perform ineffectiveness analysis and prepare related documentation at inception and on a recurring basis thereafter. As of September 30, 2013, the estimated fair value of our net derivative liabilities totaled $50.8 million.

Impairments

Securities Available-for-Sale:  We monitor our available-for-sale securities portfolio for impairments. A loss is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. We consider many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost and the severity of the decline, the amount of the unrealized loss, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. In addition, for debt securities we consider our intent to sell the debt security, our estimation of whether or not we expect to recover the debt security’s entire amortized cost if we intend to hold the debt security, and whether it is more likely than not that we will be required to sell the debt security before its anticipated recovery. For equity securities, we also consider our intent and ability to hold the equity security for a period of time sufficient for a recovery in value.

The amount of the loss that is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary is dependent on certain factors. If the security is an equity security or if the security is a debt security that we intend to sell or estimate that it is more likely than not that we will be required to sell before recovery of its amortized cost, then the impairment amount recognized in earnings is the entire difference between the estimated fair value of the security and its amortized cost. For debt securities that we do not intend to sell or estimate that we are not more likely than not to be required to sell before recovery, the impairment is separated into the estimated amount relating to credit loss and the estimated amount relating to all other factors. Only the estimated credit loss amount is recognized in earnings, with the remainder of the loss amount recognized in other comprehensive loss.

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This process involves a considerable amount of judgment by our management. As of September 30, 2013, we had aggregate unrealized losses on our securities classified as available-for-sale of approximately $2.1 million, which if not recovered may result in the recognition of future losses. During the three and nine months ended September 30, 2013, we recorded charges for impairments of securities that we determined to be other-than-temporary totaling $5.0 million and $17.5 million, respectively.

Long Lived Assets:  We evaluate our proved oil and natural gas properties and related equipment and facilities for impairment on a field-by-field basis, whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, future operating costs and a discount rate commensurate with the risk on the properties and cost of capital. Unproved oil and natural gas properties are assessed periodically and, at a minimum, annually on a property-by-property basis, and any impairment in value is recognized when incurred.

Allowance for Loan Losses

Our corporate loan portfolio is comprised of a single portfolio segment which includes one class of financing receivables, that is, high yield loans that are typically purchased via assignment or participation in either the primary or secondary market and are held primarily for investment. High yield loans are generally characterized as having below investment grade ratings or being unrated and generally consist of leveraged loans.

Our allowance for loan losses represents our estimate of probable credit losses inherent in our corporate loan portfolio held for investment as of the balance sheet date. Estimating our allowance for loan losses involves a high degree of management judgment and is based upon a comprehensive review of our loan portfolio that is performed on a quarterly basis. Our allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of our allowance for loan losses pertains to specific loans that we have determined are impaired. We determine a loan is impaired when we estimate that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis we perform a comprehensive review of our entire loan portfolio and identify certain loans that we have determined are impaired. Once a loan is identified as being impaired we place the loan on non-accrual status, unless the loan is already on non-accrual status, and record a reserve that reflects our best estimate of the loss that we expect to recognize from the loan. The expected loss is estimated as being the difference between our current cost basis of the loan, including accrued interest receivable, and the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the loan’s observable estimated fair value may be used. We also estimate the probable credit losses inherent in our unfunded loan commitments as of the balance sheet date. Any credit loss reserve for unfunded loan commitments is recorded in accounts payable, accrued expenses and other liabilities on our condensed consolidated balance sheets.

The unallocated component of our allowance for loan losses represents our estimate of probable losses inherent in our loan portfolio as of the balance sheet date where the specific loan that the loan loss relates to is indeterminable. We estimate the unallocated component of our allowance for loan losses through a comprehensive review of our loan portfolio and identify certain loans that demonstrate possible indicators of impairment, including internally assigned credit quality indicators. This assessment excludes all loans that are determined to be impaired and as a result, an allocated reserve has been recorded as described in the preceding paragraph. Such indicators include, but are not limited to, the current and/or forecasted financial performance and liquidity profile of the issuer, specific industry or economic conditions that may impact the issuer, and the observable trading price of the loan if available. All loans are first categorized based on their assigned risk grade and further stratified based on the seniority of the loan in the issuer’s capital structure. The seniority classifications assigned to loans are senior secured, second lien and subordinate. Senior secured consists of loans that are the most senior debt in an issuer’s capital structure and therefore have a lower estimated loss severity than other debt that is subordinate to the senior secured loan. Senior secured loans often have a first lien on some or all of the issuer’s assets. Second lien consists of loans that are secured by a second lien interest on some or all of the issuer’s assets; however, the loan is subordinate to the first lien debt in the issuer’s capital structure. Subordinate consists of loans that are generally unsecured and subordinate to other debt in the issuer’s capital structure.

There are three internally assigned risk grades that are applied to loans that have not been identified as being impaired: high, moderate and low. High risk means that there is evidence of possible loss due to the financial or operating performance and liquidity of the issuer, industry or economic concerns specific to the issuer, or other factors that indicate that the breach of a covenant contained in the related loan agreement is possible. Moderate risk means that while there is not observable evidence of loss, there are issuer and/or industry specific trends that indicate a loss may have occurred. Low risk means that while there is no identified evidence of loss, there is the risk of loss inherent in the loan that has not been identified. All loans held for investment, with the exception of loans that have been identified as impaired, are assigned a risk grade of high, moderate or low.

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We apply a range of default and loss severity estimates in order to estimate a range of loss outcomes upon which to base our estimate of probable losses that results in the determination of the unallocated component of our allowance for loan losses. As of September 30, 2013, the range of outcomes used to estimate concern as to the probability of default was between 1% and 20% and the range of loss severity assumptions was between 5% and 85%. The estimates and assumptions we use to estimate our allowance for loan losses are based on our estimated range of outcomes that are determined from industry information providing both historical and forecasted empirical performance of the type of corporate loans that we invest in, as well as from our own estimates based on the nature of our corporate loan portfolio. These estimates and assumptions are susceptible to change due to our corporate loan portfolio’s performance as well as industry and general economic conditions. Changes in the assumptions and estimates used to estimate our allowance for loan losses could have a material impact on our financial condition and results of operations. The default and loss severity estimates used in determining our allowance for loan losses are assessed on a quarterly and annual basis. As of September 30, 2013, management believes that these estimates are appropriate and consistent with historical and forecasted estimates evidenced and used in both industry and our corporate loan portfolio.

As of September 30, 2013, our allowance for loan losses totaled $212.6 million.

Oil and Gas Revenue Recognition

Oil, natural gas and natural gas liquid (“NGL”) revenues are recognized when production is sold to a purchaser at fixed or determinable prices, when delivery has occurred and title has transferred and collectability of the revenue is reasonably assured. We follow the sales method of accounting for natural gas revenues. Under this method of accounting, revenues are recognized based on volumes sold, which may differ from the volume to which we are entitled based on our working interest. An imbalance is recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the under-produced owners to recoup our entitled share through future production. Under the sales method, no receivables are recorded when we take less than our share of production and no payables are recorded when we take more than our share of production.

Oil, Natural Gas and Natural Gas Liquid Reserve Estimates

Proved reserves are based on the quantities of oil, natural gas and NGL that by analysis of geoscience and engineering data can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain. Independent engineering firms prepare annual reserve and economic evaluations of all of our properties, except for overriding royalty interests in certain properties in the Eagle Ford Shale, on a well-by-well basis. Similarly, the managers of our oil and gas properties prepare quarterly reserve and economic evaluations.

Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. The process performed by the independent engineers to prepare reserve amounts included their estimation of reserve quantities, future producing rates, future net revenue and the present value of such future net revenue, based in part on data provided by the managers of our oil and gas properties and us. The estimates of reserves conform to the guidelines of the SEC, including the criteria of “reasonable certainty,” as it pertains to expectations about the recoverability of reserves in future years.

The accuracy of reserve estimates is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions and the judgments of the individuals preparing the estimates.  As such, reserve estimates may materially vary from the ultimate quantities of oil, natural gas and NGL eventually recovered.

RESULTS OF OPERATIONS

Consolidated Results

The following table shows data of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	Credit				Natural Resources						Other					Reconciling Items(1)						Total Consolidated
For the three months ended September 30	2013		2012		2013			2012			2013		2012			2013			2012			2013		2012
Total revenues	$	96,243	$	121,808	$	32,446		$	21,487		$	13	$	39		$	—		$	—		$	128,702	$	143,334
Total investment costs and expenses	55,253		51,681		22,386			19,120			238		99			—			—			77,877		70,900
Total other income (loss)	6,969		78,258		(3,437		)	(5,215		)	2,694		—			—			—			6,226		73,043
Total other expenses	14,155		11,302		1,269			2,025			116		49			1,607			19,820			17,147		33,196
Income tax expense	9		316		—			—			9		1			—			—			18		317
Net income (loss)	$	33,795	$	136,767	$	5,354		$	(4,873	)	$	2,344	$	(110	)	$	(1,607	)	$	(19,820	)	$	39,886	$	111,964

	Credit					Natural Resources						Other					Reconciling Items(2)						Total Consolidated
For the nine months ended September 30	2013		2012			2013			2012			2013		2012			2013			2012			2013		2012
Total revenues	$	320,769	$	377,517		$	84,118		$	44,262		$	1,509	$	39		$	—		$	—		$	406,396	$	421,818
Total investment costs and expenses	162,097		204,443			61,355			41,179			667		185			—			—			224,119		245,807
Total other income (loss)	132,853		170,505			(918		)	(1,636		)	6,015		—			(20,269		)	(445		)	117,681		168,424
Total other expenses	43,151		35,852			3,698			4,638			484		92			27,837			36,184			75,170		76,766
Income tax expense (benefit)	420		(3,549		)	—			—			14		1			—			—			434		(3,548		)
Net income (loss)	$	247,954	$	311,276		$	18,147		$	(3,191	)	$	6,359	$	(239	)	$	(48,106	)	$	(36,629	)	$	224,354	$	271,217

(1)Consists of certain expenses not allocated to individual segments including incentive fees of zero and $17.8 million for the three months ended September 30, 2013 and 2012, respectively. The remaining reconciling items include insurance expenses, directors’ expenses and share-based compensation expense.

(2)Consists of certain expenses not allocated to individual segments including incentive fees of $22.7 million and $31.5 million for the nine months ended September 30, 2013 and 2012, respectively and losses on restructuring and extinguishment of debt of $20.3 million and $0.4 million for the nine months ended September 30, 2013 and 2012, respectively. The remaining reconciling items include insurance expenses, directors’ expenses and share-based compensation expense.

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Net income for the three months ended September 30, 2013 was $39.9 million, consisting of revenues totaling $128.7 million, investment costs and expenses totaling $77.9 million, other income totaling $6.2 million and other expenses totaling $17.1 million. Comparatively, net income for the three months ended September 30, 2012 was $112.0 million, consisting of revenues totaling $143.3 million, investment costs and expenses totaling $70.9 million, other income totaling $73.0 million and other expenses totaling $33.2 million.

Net income for the nine months ended September 30, 2013 was $224.4 million, consisting of revenues totaling $406.4 million, investment costs and expenses totaling $224.1 million, other income totaling $117.7 million and other expenses totaling $75.2 million. Comparatively, net income for the nine months ended September 30, 2012 was $271.2 million, consisting of revenues totaling $421.8 million, investment costs and expenses totaling $245.8 million, other income totaling $168.4 million and other expenses totaling $76.8 million.

Revenues

Revenues consist primarily of interest income and discount accretion from our investment portfolio, as well as oil and gas revenue from our working and royalty interests in oil and gas properties.

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Revenues decreased $14.6 million from the third quarter of 2012 compared to the third quarter of 2013 due to a reduction in loan and securities interest income of $27.3 million primarily driven by declining average par balances in our corporate debt portfolio as a result of the amortization of our legacy CLOs that have ended their reinvestment periods. In addition, the decline in interest income was attributable to (i) a decline of 0.64% in the annualized interest rate earned on our loan portfolio and (ii) comparatively less accelerated discount accretion earned because of fewer paydowns during the third quarter of 2013. These decreases were partially offset by $11.0 million of incremental oil and gas revenue as a result of increased oil production from the drilling and completion of previously undeveloped working and royalty interests and $1.7 million of additional dividend income.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Revenues decreased $15.4 million from the first nine months of 2012 compared to the same period in 2013 due to a reduction in loan and securities interest income of $63.6 million which was primarily driven by a decline of $353.3 million in the average par balance of our corporate debt securities portfolio from the first nine months of 2012 as compared to the same period in 2013. In addition, the decline in interest income was attributable to comparatively less accelerated discount accretion earned because of fewer paydowns during the first nine months of 2013. These decreases were partially offset by $39.9 million of incremental oil and gas revenue as a result of increased production from the acquisition and development of additional working and royalty interests in 2012 and 2013 and $6.3 million of additional dividend income.

Investment Costs and Expenses

Investment costs and expenses include interest expense, provision for loan losses, oil and gas production costs, depreciation, depletion and amortization expense (“DD&A”) related to oil and gas properties and other investment expenses.

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For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Investment costs and expenses increased $7.0 million from the third quarter of 2012 compared to the third quarter of 2013 primarily due to a $9.3 million increase in provision for loan losses attributable to an increase in the allocated component of our allowance for loan losses coupled with a $4.8 million increase in DD&A as a result of increased production from the drilling and completion of previously undeveloped working and royalty interests in 2012 and 2013. These increases were partially offset by an aggregate $6.8 million reduction in interest expense and interest expense to affiliates largely driven by the amortization of our legacy CLOs, as well as CLO management fees being charged for CLO 2007-1 during the third quarter of 2013, reducing the subordinated note payments to third parties for this CLO. See “Other Expenses” below for further discussion around CLO management fees.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Investment costs and expenses decreased $21.7 million from the first nine months of 2012 compared to the same period in 2013 due to a $26.1 million decrease in provision for loan losses combined with an aggregate $17.1 million decrease in interest expense and interest expense to affiliates. The comparatively larger provision for loan losses recorded in the first nine months of 2012 was as a result of an increase in the unallocated component of our allowance for loan losses based on a review of our unimpaired, held for investment loan portfolio, with particular sensitivity to the loans we designated as high risk within our internally assigned risk grades. Interest expense to affiliates fell $11.6 million from $38.1 million in the first nine months of 2012 compared to $26.5 million in the same period in 2013 largely due to the amortization of our legacy CLOs, as well as CLO management fees being charged for CLO 2007-1 during the third quarter of 2013, reducing the subordinated note payments to third parties for this CLO. See “Other Expenses” below for further discussion around CLO management fees. These negative changes were partially offset by a $22.4 million increase in oil and gas production costs and DD&A as a result of increased production from the acquisition and development of additional working and royalty interests in 2012 and 2013.

Other Income

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Other income decreased $66.8 million from the third quarter of 2012 compared to the third quarter of 2013. This change was largely driven by a $70.1 million decrease in total net realized and unrealized gain on investments as we have realized a substantial majority of the unrealized gains that were embedded in our bank loan and high yield portfolio prior to the third quarter of 2013. This decline was partially offset by $5.0 million of lower net realized and unrealized losses on derivatives, specifically commodity and credit default swaps, in the third quarter of 2013 compared to the third quarter of 2012.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Other income decreased $50.7 million from the first nine months of 2012 compared to the same period in 2013. This change was primarily as a result of a $35.4 million decline in net realized and unrealized gains on investments as certain positions with comparatively larger unrealized gains were realized prior to 2013. In addition, there was an incremental $19.8 million loss on restructuring and extinguishment of debt related to the conversion of our convertible notes during the first quarter of 2013. These decreases were partially offset by a $7.0 million increase in trade-related income.

Other Expenses

Other expenses include related party management compensation, general, administrative and directors expenses and professional services. Related party management compensation consists of base management fees payable to our Manager pursuant to the Management Agreement, collateral management fees, incentive fees and share-based compensation related to restricted common shares and common share options granted to our Manager.

Base management fees

The base management fee payable is calculated in accordance with the Management Agreement and is based on an annual rate of 1.75% times our “equity” as defined in the Management Agreement. In addition, our Manager is entitled to a quarterly incentive fee provided that our quarterly “net income” before the incentive fee exceeds a defined return hurdle, as defined in the Management Agreement.

We pay our Manager a base management fee monthly in arrears. During the three and nine months ended September 30, 2013, certain related party fees received by affiliates of our Manager were credited to us via an offset to the base management fee (“Fee Credits”). Specifically, as described in further detail below, a portion of the CLO management fees received by an affiliate of our Manager for certain of our CLOs were credited to us via an offset to the base management fee.

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In addition, during the third quarter of 2013, we invested in a transaction that generated placement fees paid to a minority-owned affiliate of KKR. In connection with this transaction, our Manager agreed to reduce the base management payable by us to our Manager for the portion of these placement fees that were earned by KKR as a result of this minority-ownership.

The table below summarizes the aggregate base management fees for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013			For the three months ended September 30, 2012		For the nine months ended September 30,2013			For the nine months ended September 30, 2012
Base management fees, gross	$	9,799		$	6,911	$	29,216		$	21,075
CLO management fees credit	(3,684		)	—		(3,915		)	—
Other related party fees credit	(1,801		)	—		(1,801		)	—
Total base management fees, net	$	4,314		$	6,911	$	23,500		$	21,075

CLO management fees

An affiliate of our Manager entered into separate management agreements with the respective investment vehicles for CLO 2005-1, CLO 2005-2, CLO 2006-1, CLO 2007-1, CLO 2007-A, CLO 2011-1 and CLO 2012-1 and is entitled to receive fees for the services performed as collateral manager for all of these CLOs, except for CLO 2011-1. The collateral manager also has the option to waive the fees it earns for providing management services for the CLO.

During the three and nine months ended September 30, 2013, our Manager agreed to credit us for a portion of the CLO management fees received by an affiliate of our Manager from CLO 2007-1 and CLO 2012-1 via an offset to the monthly base management fees payable to our Manager. As we own less than 100% of the subordinated notes of these two CLOs (with the remaining subordinated notes held by third parties), we received a Fee Credit equal only to our pro rata share of the aggregate CLO management fees paid by these CLOs. Specifically, the amount of the reimbursement for each of these CLOs was calculated by taking the product of (x) the total CLO management fees received by an affiliate of our Manager during the period for such CLO multiplied by (y) the percentage of the subordinated notes of such CLO held by us. The remaining portion of the CLO management fees paid by each of these CLOs was not credited to us, but instead resulted in a dollar-for-dollar reduction in the interest expense paid by us to the third party holder of the CLO’s subordinated notes.

The table below summarizes the aggregate CLO management fees, including the Fee Credits, for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30,2012		For the nine months ended September 30,2013		For the nine months ended September 30, 2012
Charged and retained CLO management fees (1)	$	2,232	$	1,145	$	4,514	$	3,372
CLO management fees credit	3,684		—		3,915		—
Total CLO management fees	$	5,916	$	1,145	$	8,429	$	3,372

(1)Represents management fees incurred by the senior and subordinated note holders of a CLO, excluding the Fee Credits received by us based on our ownership percentage in the CLO.

Subordinated note holders in CLOs have the first risk of loss and conversely, the residual value upside of the transactions. When CLO management fees are paid by a CLO, the residual economic interests in the CLO transaction are reduced by an amount commensurate with the CLO management fees paid. We record any residual proceeds due to subordinated note holders as interest expense on our condensed consolidated statements of operations. Accordingly, excluding our ownership portion, the increase in CLO management fees is directly offset by a decrease in interest expense.

Other fees and expenses

Professional services expenses consist of legal, accounting and other professional services. General, administrative and directors’ expenses include share-based compensation, expenses and reimbursements due to the board of directors for their services, as well as other expenses incurred by us or reimbursable by us to our Manager.

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For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Other expenses decreased $16.0 million from the third quarter of 2012 compared to the third quarter of 2013. The majority of this change was related to a decrease in incentive fees from $17.8 million recorded in the third quarter of 2012 to zero in the third quarter of 2013 as a result of our financial performance not exceeding certain benchmarks during the third quarter of 2013. In addition, net base management fees fell $2.6 million from the third quarter of 2012 to the same period in 2013. The $2.6 million change was comprised of (i) an increase in gross base management fees of $2.9 million due to an increase in equity (as defined by the Management Agreement) related to the issuance of our 7.375% preferred shares and common shares in connection with our convertible notes conversion, partially offset by (ii) $3.7 million and $1.8 million of Fee Credits in connection to CLO management fees and placement fees earned by an affiliate of our Manager, respectively.

The decline in incentive and base managements fees was slightly offset by a $4.8 million increase in CLO management fees expensed and paid in the third quarter of 2013 relating to CLO 2007-1 and 2012-1.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Other expenses decreased $1.6 million from the first nine months of 2012 compared to the same period in 2013. Most notable was a decline in incentive fees of $8.8 million from $31.5 million in the first nine months of 2012 compared to $22.7 million in the same period in 2013. Partially offsetting this change was (i) an increase in CLO management fees expense of $5.1 million due to CLO 2007-1 beginning to pay CLO management fees in the third quarter of 2013 and (ii) a net $2.4 million increase in base management fees due to an increase in equity (as defined by the Management Agreement) related to the issuance of our 7.375% preferred shares and common shares in connection with our convertible notes conversion. The $2.4 million net increase in base management fees from the first nine months of 2012 compared to the same period in 2013 consisted of (i) an $8.1 million increase in gross base management fees due to higher equity, partially offset by (ii) $3.9 million and $1.8 million of Fee Credits related to CLO management fees and placement fees earned by an affiliate of our Manager, respectively.

Segment Results

We operate our business through multiple reportable segments, which are differentiated primarily by their investment focuses.

·Credit (“Credit”): The Credit segment includes primarily below investment grade corporate debt comprised of senior secured and unsecured loans, mezzanine loans, high yield bonds, and distressed and stressed debt securities.

·Natural resources (“Natural Resources”): The Natural Resources segment, which was previously included within the other segment (“Other”), consists of non-operated working and overriding royalty interests in oil and natural gas properties. For segment reporting purposes, the Natural Resources segment excludes private equity and interests in joint ventures and partnerships focused on the oil and gas sector.

·Other: The Other segments include all other portfolio holdings, including commercial real estate.

The segments currently reported are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by the chief operating decision maker.

We evaluate the performance of our segments based on several net income components. Net income includes: (i) revenues; (ii) related investment costs and expenses; (iii) other income (loss), which is comprised primarily of unrealized and realized gains and losses on investments and derivatives and (iv) other expenses, including related party management compensation and general and administrative expenses. Certain corporate assets and expenses that are not directly related to the individual segments, including interest expense and related costs on borrowings, base management fees and professional services are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period-end. Certain other corporate assets and expenses, including prepaid insurance, incentive fees, insurance expenses, directors’ expenses and share-based compensation expense are not allocated to individual segments in our assessment of segment performance. Collectively, these items are included as reconciling items between reported segment amounts and consolidated totals. For further financial information related to our segments, refer to “Part I - Item 1. Financial Statements—Note 14. Segment Reporting.”

The following discussion and analysis regarding our results of operations is based on our reportable segments. Certain prior period information has been reclassified to conform to the current year presentation to provide additional detailed financial information as a result of the growth in our natural resources segment.

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Credit Segment

The following table presents the net income components of our credit segment for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three monthsendedSeptember 30, 2013			For the three monthsendedSeptember 30, 2012			For the nine monthsendedSeptember 30, 2013			For the nine monthsendedSeptember 30, 2012
Revenues:
Corporate loans and securities interest income	$	85,577		$	102,311		$	264,670		$	301,853
Residential mortgage-backed securities interest income	2,451			2,855			8,003			8,925
Net discount accretion	5,446			15,612			39,572			65,086
Dividend income	2,739			994			6,394			1,524
Other	30			36			2,130			129
Total revenues	96,243			121,808			320,769			377,517
Investment costs and expenses:
Interest expense:
Collateralized loan obligation secured notes	21,932			17,679			59,790			54,431
Credit facilities	216			534			647			1,612
Convertible senior notes	1			3,813			4,177			15,148
Senior notes	6,985			7,124			21,084			19,835
Junior subordinated notes	3,568			3,695			10,756			11,256
Interest rate swaps	5,648			5,646			17,081			16,826
Other interest expense	19			86			171			215
Total interest expense	38,369			38,577			113,706			119,323
Interest expense to affiliates	6,839			12,954			26,485			38,131
Provision for loan losses	9,339			—			20,407			46,498
Other	706			150			1,499			491
Total investment costs and expenses	55,253			51,681			162,097			204,443
Other income:
Realized and unrealized (loss) gain on derivatives and foreign exchange:
Credit default swaps	(1,332		)	(5,552		)	(2,974		)	(3,267		)
Total rate of return swaps	1,176			—			1,176			141
Common stock warrants	(1,219		)	734			540			1,237
Foreign exchange(1)	1,361			2,523			(2,744		)	(1,367		)
Options	90			—			122			—
Total realized and unrealized gain (loss) on derivatives and foreign exchange	76			(2,295		)	(3,880		)	(3,256		)
Net realized and unrealized gain on investments(2)	11,363			76,056			148,905			171,444
Lower of cost or estimated fair value(2)	(2,792		)	7,358			(11,442		)	1,294
Impairment of securities available for-sale and private equity at cost(2)	(5,007		)	(7,350		)	(17,496		)	(8,759		)
Other income	3,329			4,489			16,766			9,782
Total other income	6,969			78,258			132,853			170,505
Other expenses:
Related party management compensation:
Base management fees	3,964			6,481			21,756			20,048
CLO management fees	5,916			1,145			8,429			3,372
Total related party management compensation	9,880			7,626			30,185			23,420
Professional services	1,273			1,088			4,454			4,059
Other general and administrative	3,002			2,588			8,512			8,373
Total other expenses	14,155			11,302			43,151			35,852
Income before income taxes	33,804			137,083			248,374			307,727
Income tax expense (benefit)	9			316			420			(3,549		)
Net income	$	33,795		$	136,767		$	247,954		$	311,276

(1)           Includes foreign exchange contracts and foreign exchange remeasurement gain or loss.

(2)           Represent components of total net realized and unrealized gain on investments in the condensed consolidated statements of operations.

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Revenues

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Revenues decreased $25.6 million from $121.8 million in the third quarter of 2012 compared to $96.2 million in the third quarter of 2013. The decrease was attributable to a $16.7 million decline in corporate loans and securities interest income earned due to declining average par balances in the corporate debt portfolio. The average par balances for our corporate debt securities portfolio declined by $259.8 million, from $678.9 million in the third quarter of 2012 compared to $419.1 million in the third quarter of 2013. The weighted average par balances for our corporate loan portfolio declined by $82.1 million from $6.5 billion in the third quarter of 2012 compared to $6.4 billion in the third quarter of 2013. This reduction was the result of fewer purchases during 2012 and 2013 as the majority of our legacy CLOs have ended their reinvestment periods. CLO 2006-1 ended its reinvestment period during the third quarter of 2012, while CLO 2005-1, CLO 2005-2 and CLO 2007-A ended their reinvestment periods in 2011 and 2010. Refer to “Investment Portfolio Overview” above for further discussion on the principal proceeds from the assets held in each of these CLO transactions used to amortize the outstanding balance of the CLO senior notes outstanding. While we issued two new CLOs to offset the run-off of our legacy CLOs, CLO 2012-1 and CLO 2013-1 did not close until December 2012 and June 2013, respectively. We also closed an upsize of CLO 2011-1 in September 2013. In addition, the weighted average coupon declined from the third quarter of 2012. The average three-month LIBOR rate decreased to 0.26% for the third quarter of 2013 from 0.43% for the third quarter of 2012. However, partially offsetting this decline in interest rates was an increase in the percentage of our floating rate corporate debt portfolio with LIBOR floors to 58.7% as of September 30, 2013 with a weighted average floor of 1.2%, from 46.2% as of September 30, 2012 with a weighted average floor of 1.4%.

In addition, net discount accretion declined by $10.2 million as a result of (i) a $5.0 million decline in recurring accretion income due to a smaller overall corporate debt portfolio and comparatively smaller discounts as a percentage of par on the remaining portfolio and (ii) a $5.1 million decrease in accelerated discount accretion as a result of fewer paydowns during the third quarter of 2013 compared to the third quarter of 2012.

These negative changes were partially offset by a $1.7 million increase in dividend income in the third quarter of 2013 compared to the third quarter of 2012.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Revenues decreased $56.7 million from $377.5 million in the first nine months of 2012 compared to $320.8 million in the same period in 2013. The decrease was primarily attributable to a $37.2 million decline in corporate loans and securities interest income earned due to declining average par balances in the corporate debt portfolio. The average par balances for our corporate debt securities portfolio declined by $353.3 million, from $772.9 million in the first nine months of 2012 compared to $419.6 million in the same period in 2013. The weighted average par balances for our corporate loan portfolio declined by $311.0 million from $6.7 billion in the first nine months of 2012 compared to $6.4 billion in the same period in 2013. As discussed above, this reduction was the result of fewer purchases during 2012 and 2013 as the majority of our legacy CLOs have ended their reinvestment periods and our newer transactions including CLO 2012-1, CLO 2013-1 and the upsize of CLO 2011-1 were completed in December 2012, June 2013 and September 2013, respectively. Refer to “Investment Portfolio Overview” above for further discussion on the principal proceeds from the assets held in each of these CLO transactions used to amortize the outstanding balance of the CLO senior notes outstanding. The majority of our corporate debt portfolio is floating rate indexed to the three-month LIBOR. The average three-month LIBOR rate decreased to 0.28% for the first nine months of 2013 from 0.47% for the same period in 2012. However, partially offsetting this decline was an increase in the percentage of our floating rate corporate debt portfolio with LIBOR floors to 58.7% as of September 30, 2013 with a weighted average floor of 1.2%, from 46.2% as of September 30, 2012 with a weighted average floor of 1.4%.

In addition, net discount accretion decreased by $25.5 million as a net result of (i) an $18.2 million decline in recurring accretion income due to a smaller overall corporate debt portfolio and comparatively smaller discounts as a percentage of par on the remaining portfolio and (ii) a $7.0 million decrease in accelerated discount accretion as a result of fewer paydowns during the first nine months of 2013 compared to the same period in 2012.

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These positive changes were partially offset by a $4.9 million increase in dividend income in the first nine months of 2013 compared to the same period in 2012.

Investment Costs and Expenses

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Total investment costs and expenses increased $3.6 million from $51.7 million in the third quarter of 2012 compared to $55.3 million in the third quarter of 2013. The increase was primarily attributable to a $9.3 million increase in the provision for loan losses as a result of an increase in the allocated component of our allowance for loan losses. In addition, interest expense on CLO secured notes increased $4.3 million due to the closing of CLO 2012-1 and CLO 2013-1 in December 2012 and June 2013, respectively. These increases were partially offset by a $3.8 million decline in interest expense on our convertible senior notes due to the retirement and extinguishment, respectively, of our 7.0% and 7.5% convertible notes coupled with a net $6.1 million decrease in interest expense to affiliates. Interest expense to affiliates fell due to the amortization of our legacy CLOs, as well as CLO management fees being charged for CLO 2007-1 during the third quarter of 2013, reducing the subordinated note payments to third parties for this CLO.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Total investment costs and expenses decreased $42.3 million from $204.4 million in the first nine months of 2012 compared to $162.1 million in the same period in 2013. The decrease was attributable to three primary factors, including a reduction in the provision for loan losses of $26.1 million from $46.5 million in the first nine months of 2012 compared to $20.4 million in the same period in 2013. This decline was attributable to a comparatively larger provision for loan losses recorded in the first quarter of 2012 as a result of an increase in the unallocated component of our allowance for loan losses based on a review with particular sensitivity to those loans that we designated as high risk.

Secondly, interest expense to affiliates decreased by $11.6 million from $38.1 million in the first nine months of 2012 compared to $26.5 million in the same period in 2013 primarily attributable to reduced subordinated notes payments to an affiliate of our Manager that owns interest in two of our Cash Flow CLOs. Residual economic interests owed to subordinated note holders fell due to the continued amortization of outstanding senior notes in CLO 2007-A, which is out of its reinvestment period, and CLO management fees charged and paid by CLO 2007-1 during the third quarter of 2013.

Lastly, interest expense on our convertible senior notes decreased by $11.0 million from $15.1 million in the first nine months of 2012 compared to $4.2 million for the same period in 2013 due to the retirement and extinguishment, respectively, of our 7.0% and 7.5% convertible notes.

These decreases were partially offset by a $5.4 million increase in interest expense on CLO secured notes due to the fact that we closed CLO 2012-1 and CLO 2013-1 in December 2012 and June 2013, respectively.

Other Income

Other income consists of gains and losses that can be highly variable, primarily driven by episodic sales, mark-to-market, commodity prices and foreign currency exchange rates as of each period end.

The table below details the components of net realized and unrealized gains on investments, separated by financial instrument for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three monthsended September 30, 2013									For the three monthsended September 30, 2012							For the nine monthsended September 30, 2013							For the nine months ended September 30, 2012
	Unrealized gains (losses)			Realized gains (losses)			Total			Unrealized gains (losses)		Realized gains (losses)			Total		Unrealized gains (losses)		Realized gains (losses)			Total		Unrealized gains (losses)		Realized gains (losses)			Total
Corporate loans	$	252		$	1,532		$	1,784		$	23	$	6,060		$	6,083	$	3,596	$	80,120		$	83,716	$	1,469	$	31,390		$	32,859
Corporate securities	1,253			32			1,285			3,264		42,497			45,761		7,114		5,519			12,633		7,562		94,650			102,212
RMBS	5,906			(3,166		)	2,740			8,046		(4,423		)	3,623		21,804		(12,056		)	9,748		26,493		(16,806		)	9,687
Equity investments, at estimated fair value	4,892			1,416			6,308			20,066		—			20,066		37,726		1,655			39,381		25,600		223			25,823
Other (1)	(696		)	(58		)	(754		)	677		(154		)	523		3,681		(254		)	3,427		1,060		(197		)	863
Total	$	11,607		$	(244	)	$	11,363		$	32,076	$	43,980		$	76,056	$	73,921	$	74,984		$	148,905	$	62,184	$	109,260		$	171,444

(1)Includes securities sold, not yet purchased and interests in joint ventures and partnerships.

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For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Total other income decreased $71.3 million from $78.3 million in the third quarter of 2012 compared to $7.0 million in the third quarter of 2013. This decrease was primarily driven by a $64.7 million reduction in net realized and unrealized gain on investments from $76.1 million in the third quarter of 2012 compared to $11.4 million in the third quarter of 2013. This was as a result of (i) a $42.5 million decline in realized gains on our corporate debt securities portfolio from $42.5 million in the third quarter of 2012 to less than $0.1 million in the third quarter of 2013 due to comparatively higher realized gains from sales and paydowns of investments during the third quarter of 2012 and (ii) a $13.8 million decrease in net realized and unrealized gains on equity investments at estimated fair value from $20.1 million in the third quarter of 2012 compared to $6.3 million in the third quarter of 2013 primarily due to comparatively higher unrealized gains on certain of our equity investments at estimated fair value in the third quarter of 2012. We have realized a substantial majority of the unrealized gains that were embedded in our bank loan and high yield portfolio prior to the third quarter of 2013.

Furthermore, there was a $10.2 million negative change in the lower of cost or estimated fair value adjustment to corporate loans held for sale from a benefit of $7.4 million in the third quarter of 2012 compared to a charge of $2.8 million in the third quarter of 2013. As of September 30, 2013 and 2012, our loans held for sale had a carrying value of $312.3 million and $137.9 million, respectively. While the lower of cost or estimated fair value adjustment is impacted by activity in the held for sale portfolio, including sales and transfers, fluctuations in the market value typically have the largest impact on the amount of adjustment. Refer to “Investment Portfolio” below for the components comprising the lower of cost or estimated fair value adjustment.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Total other income decreased $37.7 million from $170.5 million in the first nine months of 2012 compared to $132.9 million in the same period in 2013. This decrease was primarily driven by a $22.5 million reduction in net realized and unrealized gain on investments from $171.4 million in the first nine months of 2012 compared to $148.9 million in the same period in 2013. The key driver of this change included an $89.1 million decline in realized gains on our corporate debt securities portfolio from $94.7 million in the first nine months of 2012 compared to $5.5 million in the same period in 2013 primarily due to significant realized gains from sales and paydowns of certain investments during the third quarter of 2012.

Partially offsetting this decline was (i) a $48.7 million increase in realized gains on our corporate loan portfolio from $31.4 million in the first nine months of 2012 compared to $80.1 million in the same period in 2013 primarily due to the sale of certain of our corporate loan positions during the first half of 2013 and (ii) a $13.6 million increase in net realized and unrealized gains on equity investments at estimated fair value primarily due to unrealized gains on certain positions.

Furthermore, there was a $12.7 million negative change in the lower of cost or estimated fair value adjustment to corporate loans held for sale from a benefit of $1.3 million in the first nine months of 2012 compared to a charge of $11.4 million in the same period in 2013. As of September 30, 2013 and 2012, our loans held for sale had a carrying value of $312.3 million and $137.9 million, respectively. While the lower of cost or estimated fair value adjustment is impacted by activity in the held for sale portfolio, including sales and transfers, fluctuations in the market value typically have the largest impact on the amount of adjustment. Refer to “Investment Portfolio” below for the components comprising the lower of cost or estimated fair value adjustment. Lastly, there was an $8.7 million increase in impairment losses recorded for securities available-for-sale that we determined to be other-than-temporarily impaired from $8.8 million in the first nine months of 2012 compared to $17.5 million in the same period in 2013.

The above declines were partially offset by a $7.0 million increase in trade-related income.

Other Expenses

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Other expenses increased $2.9 million from $11.3 million in the third quarter of 2012 compared to $14.2 million in the third quarter of 2013, primarily due to a $4.8 million increase in CLO management fees offset by a $2.5 million decrease in base management fees pursuant to the Management Agreement. CLO management fees increased due to the fact that CLO 2007-1 paid management fees effective August 2013. Base management fees decreased during the third quarter of 2013 due to Fee Credits related to a portion of the CLO management fees received by an affiliate of our Manager, as well as placement fees paid to a minority-owned affiliate of KKR. See “Consolidated Results” above for further discussion around the CLO management fee and base management fee offsets.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Other expenses increased $7.3 million from $35.9 million in the first nine months of 2012 compared to $43.2 million in the same period in 2013 primarily due to an increase in related party management compensation. For the first nine months of 2012 compared to the same period in 2013, CLO management fees increased $5.1 million due to the fact that CLO 2007-1 and CLO 2012-1 paid management fees effective 2013 and base management fees increased $1.7 million due to an increase in equity (as defined by the Management Agreement) related to the issuance of our 7.375% preferred shares and common shares in connection with our convertible notes conversion. See “Consolidated Results” above for further discussion around the CLO management fee and base management fee offsets.

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Natural Resources Segment

The following table presents the net income (loss) components of our natural resources segment for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013			For the three months ended September 30, 2012			For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Revenues:
Oil and gas revenue:
Natural gas sales	$	7,456		$	8,067		$	23,943		$	14,733
Oil sales	19,791			8,960			45,807			20,407
Natural gas liquids sales	4,000			4,460			10,994			9,119
Other	1,199			—			3,374			3
Total revenues	32,446			21,487			84,118			44,262
Investments costs and expenses:
Oil and gas production costs:
Lease operating expenses	3,915			3,805			12,164			9,584
Workover expenses	826			1,377			2,375			2,344
Transportation and marketing expenses	2,847			3,509			7,181			4,693
Severance and ad valorem taxes	1,575			1,112			4,700			2,420
Total oil and gas production costs	9,163			9,803			26,420			19,041
Oil and gas depreciation, depletion and amortization	11,806			7,011			29,910			14,867
Interest expense:
Credit facilities	464			863			1,755			2,078
Convertible senior notes	—			229			244			692
Junior subordinated notes	235			222			673			534
Senior notes	461			427			1,319			974
Total interest expense	1,160			1,741			3,991			4,278
Other	257			565			1,034			2,993
Total investment costs and expenses	22,386			19,120			61,355			41,179
Other loss:
Net realized and unrealized (loss) gain on derivatives and foreign exchange:
Commodity swaps	(3,723		)	(5,807		)	(1,717		)	673
Net realized and unrealized loss on investments(1)	—			(290		)	—			(3,191		)
Other income	286			882			799			882
Total other loss	(3,437		)	(5,215		)	(918		)	(1,636		)
Other expenses:
Related party management compensation:
Base management fees	262			388			1,345			950
Professional services	272			35			749			260
Insurance	56			3			173			3
Other general and administrative	679			1,599			1,431			3,425
Total other expenses	1,269			2,025			3,698			4,638
Income (loss) before income taxes	5,354			(4,873		)	18,147			(3,191		)
Income tax expense	—			—			—			—
Net income (loss)	$	5,354		$	(4,873	)	$	18,147		$	(3,191	)

(1)           Includes impairment of oil and gas properties

Our oil and gas results depend substantially on natural gas and oil prices and production levels, as well as drilling and operating costs. The price we realize for our production is affected by our hedging activities. In order to help mitigate the potential exposure and effects of changing commodity prices on our revenues and cash flows from operations, we have entered into commodity swaps for a portion of our working and overriding royalty interests. Our policy has been to hedge a substantial portion of the total estimated oil, natural gas and NGL production on our working and overriding royalty interests for a specified amount of time. Our commodity derivatives are described further below under “Other Loss”.

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Production and Sales Statistics

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Average daily production:
Natural gas (Mcf/d)	24,488		31,707		25,351		22,658
Oil (Bbls/d)	2,048		913		1,607		695
NGL (Bbls/d)	1,474		1,335		1,469		538
Total (Mcfe/d)(1)	45,619		45,191		43,808		30,056
Weighted average prices (hedged)(2):
Natural gas (MMBtu)	$	3.45	$	3.02	$	3.62	$	2.92
Oil (Bbl)	$	100.38	$	105.48	$	102.35	$	105.66
NGL (Bbl)	$	33.10	$	38.13	$	29.40	$	34.57
Weighted average prices (unhedged)(3):
Natural gas (MMBtu)	$	3.31	$	2.77	$	3.46	$	2.39
Oil (Bbl)	$	105.06	$	105.52	$	104.39	$	105.73
NGL (Bbl)	$	29.49	$	36.39	$	27.42	$	33.30
Average Henry Hub and WTI spot prices:
Natural gas (MMBtu)	$	3.55	$	2.87	$	3.68	$	2.53
Oil (Bbl)	$	105.84	$	92.18	$	98.09	$	96.16
Costs per Mcfe of production:
Lease operating expenses	$	0.09	$	0.08	$	0.28	$	0.32
Transportation and marketing expenses	$	0.06	$	0.08	$	0.16	$	0.18
General and administrative expenses	$	0.03	$	0.02	$	0.07	$	0.18
Depreciation, depletion and amortization	$	0.26	$	0.14	$	0.68	$	0.47
Taxes, other than income taxes	$	0.03	$	0.02	$	0.11	$	0.08

(1)Calculated using a ratio of six Mcf of natural gas to one Bbl of oil, condensate or NGLs.

(2)Includes the effect of realized losses on commodity derivatives of less than $0.1 million and realized gains of $0.9 million for the three months ended September 30, 2013 and 2012, respectively and realized gains of approximately $1.0 million and $3.6 million for the nine months ended September 30, 2013 and 2012, respectively.

(3)Does not include the effect of realized gains (losses) on derivatives.

Revenues

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Revenue increased $11.0 million from $21.5 million in the third quarter of 2012 compared to $32.4 million in the third quarter of 2013 due to the increase in oil production resulting from the drilling and completion of previously undeveloped working and overriding royalty interest properties. As of September 30, 2013, our working and overriding royalty interests had a net carrying value of $378.2 million, as compared to $305.8 million as of September 30, 2012.

Average daily production increased 1% from the third quarter of 2012 compared to the third quarter of 2013, primarily comprised of a 124% increase in average daily oil production, partially offset by a 23% decline in average daily natural gas production. Factors driving production levels include the drilling and completion of properties during the respective periods. As the average unhedged prices for natural gas and oil were $2.77 and $105.52, respectively, for the third quarter of 2012 and $3.31 and $105.06, respectively, for the third quarter of 2013, the combination of production and price for oil sales significantly contributed to the increase in total revenues, partially offset by a slight decline in natural gas sales.

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For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Revenue increased $39.9 million from $44.3 million for the first nine months of 2012 compared to $84.1 million in the same period in 2013 due to an increase in production.

Average daily production increased 46% from the first nine months of 2012 compared to the same period in 2013 primarily due to acquisitions of producing properties and drilling and completion of properties during 2012 and 2013.

Investment Costs and Expenses

Investment costs and expenses consist of production costs, DD&A and other expenses related to acquisitions.

Production costs represent costs incurred to operate and maintain our wells, or lease operating expenses, as well as transportation and marketing costs. Lease operating expenses include expenses such as labor, rented equipment, field office, saltwater disposal, maintenance, tools and supplies and workover expenses. As we continue to acquire working interests in oil and natural gas properties, lease operating expenses will continue to increase in conjunction with an increase in oil, natural gas and NGL production. Furthermore, we have agreements with third parties to act as managers of certain of our oil and natural gas properties. Services provided by these third party managers include making the business and operational decisions related to the production and sale of oil, natural gas and NGLs, collection and disbursement of revenues, operating expenses, general and administrative expenses and other necessary and useful services for the operation of the assets. Again, as the overall number of oil and natural gas properties increase, the related costs to manage these properties increase correspondingly.

Production costs also include severance and ad valorem taxes, which increase or decrease primarily when prices of oil and natural gas increase or decrease, but are also affected by changes in production, as well as property values.

DD&A represents recurring charges related to the exhaustion of mineral reserves for our natural resources investments. DD&A is calculated using the units-of-production method, which depletes capitalized costs of producing oil and natural gas properties based on the ratio of current production to estimated total net proved oil, natural gas and NGL reserves, and total net proved developed oil, natural gas and NGL reserves. Our depletion expense is affected by factors including positive and negative reserve revisions primarily related to well performance, commodity prices, additional capital expended to develop new wells and reserve additions resulting from development activity and acquisitions.

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Total investment costs and expenses increased $3.3 million from $19.1 million in the third quarter of 2012 compared to $22.4 million in the third quarter of 2013. The increase was primarily driven by a $4.8 million increase in DD&A from $7.0 million in the third quarter of 2012 compared to $11.8 million in the third quarter of 2013 due to an increase in production and depletable costs that resulted from the drilling and completion of additional wells.

This increase was partially offset by lower total oil and gas production costs of $0.6 million from $9.8 million in the third quarter of 2012 compared to $9.2 million in the third quarter of 2013. Most notable were the declines in (i) transportation and marketing expenses of $0.7 million, which is consistent with the decline in natural gas and natural gas liquids sales revenues, and (ii) workover expenses of $0.6 million from the third quarter of 2012 compared to the third quarter of 2013 as a result of increased workover activity necessary in 2012 for wells acquired earlier in the year from external parties. In contrast, lease operating expenses increased $0.1 million. As described above, we developed additional producing oil and natural gas properties during 2012 and 2013 and thus, certain costs associated with operating and managing the wells increased.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Total investment costs and expenses increased $20.2 million from $41.2 million in the first nine months of 2012 compared to $61.4 million in the same period in 2013. As described above, we acquired additional producing oil and natural gas properties during 2012 and developed previously undeveloped properties in 2013 and thus, the costs associated with operating and managing the wells increased. Total oil and gas production costs increased $7.4 million from $19.0 million in the first nine months of  2012 compared to $26.4 million in the same period in 2013. Most notable was the increase in lease operating expenses of $2.6 million, transportation and marketing expenses of $2.5 million and severance and ad valorem taxes of $2.3 million related to an increase in well count and production. Similarly, DD&A increased $15.0 million from $14.9 million in the first nine months of 2012 compared to $29.9 million in the same period in 2013 due to an increase in production and depletable costs that resulted from incremental acquisitions and drilling and completion of additional wells.

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Other Loss

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Total other loss decreased $1.8 million from $5.2 million in the third quarter of 2012 compared to $3.4 million in the third quarter of 2013, primarily attributable to comparatively lower mark-to-market losses on our commodity swaps.

We have entered into receive-fixed, pay-floating commodity derivative contracts, specifically oil, natural gas and certain NGL product swaps, for certain years through 2016. Our unhedged production may expose us to commodity price declines or alternatively, provide the potential upside from commodity price increases. Our price hedging strategy and future hedging transactions, including the prices at which we hedge our production, are dependent upon several factors, including expected production and commodities prices at the time we enter into these transactions.

Net realized and unrealized losses on commodity swaps decreased $2.1 million from $5.8 million in the third quarter of 2012 compared to $3.7 million in the third quarter of 2013. Unrealized gains and losses on commodity swaps result from changes in commodity prices from period to period, as well as changes in market valuations of derivatives as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, unrealized losses are recognized; if the expected future commodity prices decrease compared to the contract prices on the derivatives, unrealized gains are recognized. The fair value of our open derivative contracts totaled a net asset of $3.4 million as of September 30, 2012 (compared to $10.2 million as of June 30, 2012) and $4.3 million as of September 30, 2013 (compared to $8.0 million as of June 30, 2013). The fair value increase of $0.9 million from September 30, 2012 to September 30, 2013 was primarily due to new contracts entered into subsequent to September 30, 2012, the change in the forward curves for each commodity and the settlement of contracts during 2012 and 2013.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Total other loss decreased $0.7 million from $1.6 million in the first nine months of 2012 compared to $0.9 million in the same period in 2013, primarily attributable to $3.3 million of impairment charges recorded in the first nine months of 2012 to write down certain proved oil and natural gas properties. No impairment charges were recorded during the first nine months of 2013. This was partially offset by $2.4 million of incremental net realized and unrealized losses on commodity swaps recorded in the first nine months of 2013.

We have entered into receive-fixed, pay-floating commodity derivative contracts, specifically oil, natural gas and certain NGL product swaps, for certain years through 2016 as described above. Net realized and unrealized gains on commodity swaps decreased $2.4 million from a gain of $0.7 million in the first nine months of 2012 compared to a loss of $1.7 million in the same period in 2013. Unrealized gains and losses on commodity swaps result from changes in commodity prices from period to period, as well as changes in market valuations of derivatives as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, unrealized losses are recognized; if the expected future commodity prices decrease compared to the contract prices on the derivatives, unrealized gains are recognized.

Other Expenses

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Total other expenses decreased $0.8 million from $2.0 million in the third quarter of 2012 compared to $1.3 million in the third quarter of 2013, primarily due to the reversal of certain accrued expenses based on actual amounts due, such as reimbursable costs and payments due to the third party we engaged to operate and manage a portion of our interests.  These declines were partially offset by additional allocated professional services expenses. As mentioned above, corporate expenses are allocated based on the investment portfolio balance in each respective segment.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Total other expenses decreased $0.9 million from $4.6 million in the first nine months of 2012 to $3.7 million in the same period in 2013, primarily due to a $2.0 million reduction in other general and administrative expenses primarily due to the reversal of certain accrued expenses based on actual amounts due, such as reimbursable costs and payments due to the third party we engaged to operate and manage a portion of our interests. These declines were partially offset by additional allocated corporate expenses, including base management fees and professional services expenses. As mentioned above, corporate expenses are allocated based on the investment portfolio balance in each respective segment.

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Other Segments

The following table presents the net income (loss) components of our other segments for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the threemonths ended September 30, 2013		For the threemonths ended September 30, 2012			For the ninemonths ended September 30,2013		For the nine months ended September 30,2012
Revenues:
Dividend income	$	13	$	39		$	1,509	$	39
Total revenues	13		39			1,509		39
Investment costs and expenses:
Interest expense:
Credit facilities	5		4			12		6
Convertible senior notes	—		25			50		53
Junior subordinated notes	79		24			204		43
Senior notes	154		46			401		83
Total interest expense	238		99			667		185
Total investment costs and expenses	238		99			667		185
Other income:
Net realized and unrealized gain on derivatives and foreign exchange	585		—			585		—
Net realized and unrealized gain on investments	2,109		—			5,430		—
Total other income	2,694		—			6,015		—
Other expenses:
Related party management compensation:
Base management fees	88		42			399		77
Professional services	28		7			85		15
Total other expenses	116		49			484		92
Income (loss) before income taxes	2,353		(109		)	6,373		(238		)
Income tax expense	9		1			14		1
Net income (loss)	$	2,344	$	(110	)	$	6,359	$	(239	)

Revenues

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

We began acquiring commercial real estate assets in the second quarter of 2012. As of September 30, 2013 and 2012, these investments had a carrying value of $156.7 million and $44.7 million, respectively and are included within other assets on our condensed consolidated balance sheets. Revenues totaled less than $0.1 million for each of the third quarters of 2012 and 2013 on these investments. This is due to the fact that most of these investments are less than a year old and require development before meaningful revenues can be expected.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Revenues totaled less than $0.1 million and $1.5 million for the first nine months of 2012 and 2013, respectively. The $1.5 million represented a dividend payment related to one of our commercial real estate investments paid in the first quarter of 2013.

Investment Costs and Expenses

Certain corporate assets and expenses that are not directly related to a segment, including interest expense and related costs on borrowings are allocated to individual segments based on the investment portfolio balance in each segment as of the most recent period-end.

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For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Investment costs and expenses increased $0.1 million from the third quarter of 2012 compared to the third quarter of 2013 as a result of the acquisitions made in 2012 and 2013, thereby increasing the investment portfolio balance and amounts allocated for costs and expenses.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Investment costs and expenses increased $0.5 million from the first nine months of 2012 compared to the same period in 2013 as a result of the acquisitions made in 2012 and 2013, thereby increasing the investment portfolio balance and amounts allocated for costs and expenses.

Other Income

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Other income totaled $2.7 million for the third quarter of 2013 which primarily represented net unrealized gains on our holdings. Commercial real estate holdings are recorded at estimated fair value on our condensed consolidated balance sheets with net realized and unrealized gain on investments recorded in other income. Also, included in total other income was $0.6 million of unrealized gains on foreign exchange forward contracts and remeasurement on our foreign denominated commercial real estate assets. We began acquiring commercial real estate investments during the second quarter of 2012 and no other income or loss was recognized in the third quarter of 2012.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Other income totaled $6.0 million in the first nine months of 2013 which primarily represented net unrealized gains on our commercial real estate holdings. Also included in total other income in the first nine months of 2013 was $0.6 million of unrealized gains on foreign exchange forward contracts and remeasurement on our foreign denominated commercial real estate assets. We began acquiring commercial real estate investments during the second quarter of 2012 and no other income or loss was recognized for the first nine months of 2012.

Other Expenses

Other expenses are comprised of certain corporate expenses that are not directly related to the segment, but were allocable costs based on the portfolio balance within the segment as of the most recent period-end.

For the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Other expenses increased $0.1 million from the third quarter of 2012 compared to the third quarter of 2013 primarily due to the increased allocation of corporate expenses charged during the third quarter of 2013.

For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Other expenses increased $0.4 million from the first nine months of 2012 compared to the same period in 2013 primarily due to the increased allocation of corporate expenses charged during the first nine months of 2013.

Income Tax Provision

We intend to continue to operate so that we qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation. Therefore, we generally are not subject to United States federal income tax at the entity level, but are subject to limited state and foreign taxes. Holders of our common shares are required to take into account their allocable share of each item of our income, gain, loss, deduction and credit for our taxable year end ending within or with their taxable year.

We hold equity interests in certain subsidiaries which have elected or intend to elect to be taxed as real estate investment trusts (“REIT subsidiaries”) under the Internal Revenue Code of 1986, as amended (the “Code”). A REIT is not subject to United States federal income tax to the extent that it currently distributes its income and satisfies certain asset, income and ownership tests, and recordkeeping requirements, but it may be subject to some amount of federal, state, local and foreign taxes based on its taxable income.

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We have wholly-owned domestic and foreign subsidiaries that are taxable as corporations for United States federal income tax purposes and thus are not consolidated by us for United States federal income tax purposes. For financial reporting purposes, current and deferred taxes are provided for on the portion of earnings recognized by us with respect to our interest in the domestic taxable corporate subsidiaries, because each is taxed as a regular corporation under the Code. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP consolidated financial statements and the United States federal income tax basis of assets and liabilities as of each condensed consolidated balance sheet date. The foreign corporate subsidiaries were formed to make certain foreign and domestic investments from time to time. The foreign corporate subsidiaries are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands, and are anticipated to be exempt from United States federal and state income tax at the corporate entity level because they restrict their activities in the United States to trading in stock and securities for their own account. They generally will not be subject to corporate income tax in our financial statements on their earnings, and no provisions for income taxes for the three and nine months ended September 30, 2013 were recorded; however, we will be required to include their current taxable income in our calculation of our taxable income allocable to shareholders. CLO 2005-1, CLO 2005-2, CLO 2006-1, CLO 2007-1, CLO 2007-A, CLO 2009-1 and CLO 2011-1 are our foreign subsidiaries that elected to be treated as disregarded entities or partnerships for United States federal income tax purposes. These subsidiaries were established to facilitate securitization transactions, structured as secured financing transactions.

Our REIT subsidiaries are not expected to incur a federal tax expense, but are subject to limited state income tax expense related to the 2013 tax year. For the three and nine months ended September 30, 2013, we recorded $0.1 million federal and state tax benefit and $0.1 million of federal and state tax expense for our domestic corporate subsidiaries, respectively. Additionally, we recorded $0.1 million and $0.3 million of state and foreign tax expense for our non-corporate subsidiaries for the three and nine months ended September 30, 2013, respectively. Accordingly, for the three and nine months ended September 30, 2013, we recorded income tax expense of less than $0.1 million and $0.4 million, respectively. As of September 30, 2013, cumulative tax liability is included in accounts payable, accrued expenses and other liabilities on our condensed consolidated balance sheet.

Investment Portfolio

Our investment portfolio primarily consists of corporate debt holdings, consisting of corporate loans and corporate debt securities. The details of our corporate debt portfolio are discussed below under “Corporate Debt Portfolio”. Also included in our investment portfolio are our other holdings, including oil and gas working and royalty interests, equity investments, and interests in joint ventures and partnerships, which are all discussed below under “Other Holdings”.

The following table summarizes the carrying value of our investment portfolio by strategy as of September 30, 2013 (amounts in thousands):

	Bank Loans & High Yield Bonds		Natural Resources		Special Situations		Mezzanine		Commercial Real Estate		Private Equity		Total
Corporate loans(1)	$	6,131,564	$	—	$	169,417	$	64,685	$	—	$	—	$	6,365,666
Securities(2)	368,183		—		72,106		—		—		—		440,289
Equity investments, at estimated fair value(3)	32,086		12,000		53,149		7,266		—		86,652		191,153
Oil and gas properties, net	—		372,034		—		—		—		—		372,034
Other assets(4)	—		84,225		25,309		330		156,684		84,542		351,090
Total	$	6,531,833	$	468,259	$	319,981	$	72,281	$	156,684	$	171,194	$	7,720,232

(1)Includes loans held for sale and loans at estimated fair value. Amounts presented are gross of allowance for loan losses totaling $212.6 million as of September 30, 2013.

(2)Excludes our investments in RMBS with an estimated fair value of $79.4 million.

(3)Includes certain marketable equity securities and private equity investments, including bank loans and high yield debt securities which were restructured from debt instruments to equity, for which we elected the fair value option of accounting.

(4)Includes interests in joint ventures and partnerships.

The table above reconciles our assets as presented on our condensed consolidated balance sheets to our strategies, which differs from our reportable segments. For segment reporting purposes, the majority of our corporate debt portfolio and equity investments, at estimated fair value are included within our Credit segment. Our Natural Resources and Other segments include our oil and natural gas properties and commercial real estate investments, respectively. Our Natural Resources segment excludes the private equity and interests in joint ventures and partnerships focused on the oil and gas sector (included in equity investments, at estimated fair value and other assets on our condensed consolidated balance sheets).

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Corporate Debt Portfolio

Our corporate debt investment portfolio primarily consists of investments in corporate loans and corporate debt securities. Our corporate loans primarily consist of senior secured, second lien and subordinated loans. The corporate loans we invest in are generally below investment grade and are primarily floating rate indexed to either one-month or three-month LIBOR. Our investments in corporate debt securities primarily consist of fixed rate investments in below investment grade corporate bonds that are senior secured, senior unsecured and subordinated. We evaluate and monitor the asset quality of our investment portfolio by performing detailed credit reviews and by monitoring key credit statistics and trends. The key credit statistics and trends we monitor to evaluate the quality of our investments include credit ratings of both our investments and the issuer, financial performance of the issuer including earnings trends, free cash flows of the issuer, debt service coverage ratios of the issuer, financial leverage of the issuer, and industry trends that have or may impact the issuer’s current or future financial performance and debt service ability.

We do not require specific collateral or security to support our corporate loans and debt securities; however, these loans and debt securities are either secured through a first or second lien on the assets of the issuer or are unsecured. We do not have access to any collateral of the issuer of the corporate loans and debt securities, rather the seniority in the capital structure of the loans and debt securities determines the seniority of our investment with respect to prioritization of claims in the event that the issuer defaults on the outstanding debt obligation.

Corporate Loans

Our corporate loan portfolio had an aggregate par value of $6.6 billion and $6.5 billion as of September 30, 2013 and December 31, 2012, respectively. Our corporate loan portfolio consists of debt obligations of corporations, partnerships and other entities in the form of senior secured loans, second lien loans and subordinated loans.

The following table summarizes our corporate loans portfolio stratified by type as of September 30, 2013 and December 31, 2012. Loans that are not deemed to be held for sale are carried at amortized cost, net of allowance for loan losses, on our condensed consolidated balance sheets. Loans that are classified as held for sale are carried at the lower of net amortized cost or estimated fair value on our condensed consolidated balance sheets. We also have certain loans that we elected to carry at estimated fair value.

Corporate Loans

(Amounts in thousands)

	September 30, 2013(1)									December 31, 2012(1)
	Par		Carrying Value			Amortized Cost		Estimated Fair Value		Par		Carrying Value			Amortized Cost		Estimated Fair Value
Senior secured	$	6,045,145	$	5,890,632		$	5,890,632	$	5,767,141	$	5,761,308	$	5,575,437		$	5,575,437	$	5,494,676
Second lien	384,166		371,756			371,756		326,338		457,333		433,020			433,020		334,191
Subordinated	150,168		122,577			122,577		115,201		264,722		174,694			174,694		233,308
Subtotal	6,579,479		6,384,965			6,384,965		6,208,680		6,483,363		6,183,151			6,183,151		6,062,175
Lower of cost or fair value adjustment	—		(24,843		)	—		—		—		(14,047		)	—		—
Allowance for loan losses	—		(212,594		)	—		—		—		(223,472		)	—		—
Unrealized gains	—		5,544			—		—		—		2,225			—		—
Total	$	6,579,479	$	6,153,072		$	6,384,965	$	6,208,680	$	6,483,363	$	5,947,857		$	6,183,151	$	6,062,175

(1)Includes loans held for sale and loans carried at estimated fair value.

As of September 30, 2013, $6.4 billion par amount, or 97.9%, of our corporate loan portfolio was floating rate and $136.6 million par amount, or 2.1%, was fixed rate. In addition, as of September 30, 2013, $249.6 million par amount, or 3.8%, of our corporate loan portfolio was denominated in foreign currencies, of which 70.1% was denominated in Euros. As of December 31, 2012, $6.5 billion par amount, or 99.7%, of our corporate loan portfolio was floating rate and $22.3 million par amount, or 0.3%, was fixed rate. In addition, as of December 31, 2012, $328.9 million par amount, or 5.1%, of our corporate loan portfolio was denominated in foreign currencies, of which 68.8% was denominated in Euros.

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All of our floating rate corporate loans have index reset frequencies of less than twelve months with the majority resetting at least quarterly. The weighted average coupon on our floating rate corporate loans was 4.8% as of September 30, 2013 and 5.3% as of December 31, 2012, and the weighted average coupon spread to LIBOR of our floating rate corporate loan portfolio was 3.9% as of September 30, 2013 and 4.5% as of December 31, 2012. The weighted average years to maturity of our floating rate corporate loans was 4.1 years and 4.3 years as of September 30, 2013 and December 31, 2012, respectively.

As of September 30, 2013, our fixed rate corporate loans had a weighted average coupon of 10.8% and a weighted average years to maturity of 5.3 years, as compared to 12.5% and 1.5 years, respectively, as of December 31, 2012.

Non-Accrual Loans

We hold certain corporate loans designated as being non-accrual, impaired and/or in default. Non-accrual loans consist of (i) corporate loans held for investment, including impaired loans, (ii) corporate loans held for sale and (iii) loans carried at estimated fair value. Any of these three classifications may include those loans modified in a troubled debt restructuring (“TDR”), which are typically designated as being non-accrual (see “Troubled Debt Restructurings” section below).

Loans are placed on non-accrual when there is uncertainty regarding whether future income amounts on the loan will be earned and collected. While on non-accrual status, interest income is recognized using the cost-recovery method, cash-basis method or some combination of the two methods. A loan is placed back on accrual status when the ultimate collectability of the principal and interest is not in doubt. When placed on non-accrual status, previously recognized accrued interest is reversed and charged against current income.

The following table summarizes our recorded investment in non-accrual loans as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	September 30, 2013		December 31, 2012
Loans held for investment(1)	$	554,541	$	445,437
Loans held for sale	51,076		90,840
Loans at estimated fair value	13,191		—
Total non-accrual loans	$	618,808	$	536,277

(1)   Comprised of impaired loans held for investment as of September 30, 2013 and December 31, 2012, respectively.

The $82.5 million increase in non-accrual loans from $536.3 million as of December 31, 2012 to $618.8 million as of September 30, 2013 was primarily due to $166.0 million of additions, of which $154.1 million is related to impaired loans, partially offset by $49.7 million of sales of loans and $28.4 million of restructures that occurred during the period. During the three and nine months ended September 30, 2013, we recognized $5.5 million and $20.9 million, respectively, of interest income from cash receipts for loans on non-accrual status. During the three and nine months ended September 30, 2012, we recognized $8.4 million and $15.1 million, respectively, of interest income from cash receipts for loans on non-accrual status.

Impaired Loans

Impaired loans consist of loans held for investment where we have determined that it is probable that we will not recover our outstanding investment in the loan under the contractual terms of the loan agreement. Impaired loans may or may not be in default at the time a loan is designated as being impaired and all impaired loans are placed on non-accrual status. Impaired loans on a recorded investment basis increased from $445.4 million as of December 31, 2012 to $554.5 million as of September 30, 2013 primarily due to $154.1 million of additions to impaired loans, partially offset by $29.6 million of loans that were extinguished through TDRs and $14.1 million of transfers from held-for-investment to held-for-sale.

Defaulted Loans

Defaulted loans consist of corporate loans that have defaulted under the contractual terms of their loan agreements. The balance of defaulted loans may be comprised of loans held for investment and loans held for sale. Loans that are held for sale are carried at the lower of amortized cost or estimated market value and, accordingly, no allowance for loan losses is maintained for such loans. In contrast, loans that are specifically identified as being impaired have a specific allocated reserve that represents the excess of the loan’s amortized cost amount over its estimated fair value. Since defaulted loans may primarily consist of loans classified as held for sale and impaired loans consist of only loans held for investment, fluctuations in the balances of defaulted loans will not necessarily correspond to fluctuations in impaired loans.

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As of September 30, 2013, we held six corporate loans that were in default with a total amortized cost of $215.7 million from two issuers. Of the $215.7 million total amortized cost, $203.7 million were included in the loans that comprised the allocated component of our allowance for loan losses and $12.0 million were included in loans carried at estimated fair value. As of December 31, 2012, we held two corporate loans that were in default with a total amortized cost of $50.4 million from one issuer and were included in the loans for which the allocated component of our allowance for loan losses was related to.

Troubled Debt Restructurings

The recorded investment balance of TDRs totaled $61.7 million related to four TDRs and $25.5 million related to one TDR at September 30, 2013 and December 31, 2012, respectively. Loans whose terms have been modified in a TDR are considered impaired, unless accounted for at fair value or the lower of cost or estimated fair value, and are typically placed on non-accrual status, but can be moved to accrual status when, among other criteria, payment in full of all amounts due under the restructured terms is expected and the borrower has demonstrated a sustained period of repayment performance, typically six months. As of September 30, 2013 and December 31, 2012, $61.7 million and $25.5 million of TDRs were included in non-accrual loans, respectively (see “Non-Accrual Loans” section above). As of September 30, 2013 and December 31, 2012, the allowance for loan losses included specific reserves of $9.4 million and $0.5 million related to TDRs, respectively. As of September 30, 2013, there were no commitments to lend additional funds to the borrowers whose loans had been modified in a TDR.

The following table presents the aggregate balance of loans by loan class whose terms have been modified in a TDR during the three and nine months ended September 30, 2013. There were zero and three new TDRs during the three and nine months ended September 30, 2013, respectively, and no loans were modified in a TDR during both the three and nine months ended September 30, 2012. The modifications in the first quarter of 2013 involved conversions of the loans into one of the following: (i) new term loans with extended maturities and fixed, rather than floating, interest rates, (ii) equity carried at estimated fair value, or (iii) a combination of equity and loans carried at estimated fair value. The modification involving an extension of maturity date was for an additional four-year period with a higher coupon of 6.8%.

	Three months endedSeptember 30, 2013					Nine months endedSeptember 30, 2013
	Number of loans	Pre-modification outstanding recorded investment(1)		Post-modification outstanding recorded investment(1)		Number of loans	Pre-modification outstanding recorded investment(1)		Post-modification outstanding recorded investment(1)(2)
Troubled debt restructurings:
Loans held for investment	—	$	—	$	—	2	$	68,358	$	39,430
Loans held for sale	—	—		—		—	—		—
Loans at estimated fair value	—	—		—		1	1,670		1,229
Total	—	$	—	$	—	3	$	70,028	$	40,659

(1)Recorded investment is defined as amortized cost plus accrued interest.

(2)Excludes equity securities received from the TDRs with an estimated fair value of $2.1 million.

Prior to TDRs in the first quarter of 2013, two of the new TDRs described above were already identified as impaired and had specific allocated reserves, while the third was a loan carried at estimated fair value. Upon restructuring the two impaired loans held for investment, the difference between the recorded investment of the pre-modified loans and the estimated fair value of the new assets was charged-off against the allowance for loan losses. The TDRs resulted in zero and $26.8 million of charge-offs for the three and nine months ended September 30, 2013, respectively, which comprised 86% of the total $31.3 million of charge-offs recorded during the nine months ended September 30, 2013.

As of September 30, 2013, no loans modified as TDRs were in default within a twelve month period subsequent to their original restructuring.

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We modified $195.6 million and $2.0 billion amortized cost of corporate loans during the three and nine months ended September 30, 2013, respectively, that did not qualify as TDRs. Comparatively, we modified $346.7 million and $1.4 billion amortized cost of corporate loans during the three and nine months ended September 30, 2012, respectively, that did not qualify as TDRs. These modifications involved changes in existing rates and maturities to prevailing market rates/maturities for similar instruments and did not qualify as TDRs as the respective borrowers were neither experiencing financial difficulty nor were seeking (nor granted) a concession as part of the modification. In addition, these modifications of non-troubled debt holdings were accomplished with modified loans that were not substantially different from the loans prior to modification.

Allowance for Loan Losses

The following table summarizes the changes in our allowance for loan losses for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30,2013		For the three months ended September 30,2012			For the nine months ended September 30,2013			For the nine months ended September 30,2012
Allowance for loan losses:
Beginning balance	$	203,255	$	235,807		$	223,472		$	191,407
Provision for loan losses	9,339		—			20,407			46,498
Charge-offs	—		(9,925		)	(31,285		)	(12,023		)
Ending balance	$	212,594	$	225,882		$	212,594		$	225,882

As of September 30, 2013 and December 31, 2012, we had an allowance for loan loss of $212.6 million and $223.5 million, respectively. As described under “Critical Accounting Policies”, our allowance for loan losses represents our estimate of probable credit losses inherent in our corporate loan portfolio held for investment as of the balance sheet date. Estimating our allowance for loan losses involves a high degree of management judgment and is based upon a comprehensive review of our loan portfolio that is performed on a quarterly basis. Our allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of our allowance for loan losses pertains to specific loans that we have determined are impaired. We determine a loan is impaired when we estimate that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis we perform a comprehensive review of our entire loan portfolio and identify certain loans that we have determined are impaired. Once a loan is identified as being impaired we place the loan on non-accrual status, unless the loan is already on non-accrual status, and record a reserve that reflects our best estimate of the loss that we expect to recognize from the loan. The expected loss is estimated as being the difference between our current cost basis of the loan, including accrued interest receivable, and the loan’s estimated fair value.

The unallocated component of our allowance for loan losses represents our estimate of probable losses inherent in our loan portfolio as of the balance sheet date where the specific loan that the loan loss relates to is indeterminable. We estimate the unallocated component of our allowance for loan losses through a comprehensive quarterly review of our loan portfolio and identify certain loans that demonstrate possible indicators of impairment, including internally assigned credit quality indicators. This assessment excludes all loans that are determined to be impaired and as a result, an allocated reserve has been recorded as described in the preceding paragraph. Such indicators include, but are not limited to, the current and/or forecasted financial performance and liquidity profile of the issuer, specific industry or economic conditions that may impact the issuer, and the observable trading price of the loan if available. All loans are first categorized based on their assigned risk grade and further stratified based on the seniority of the loan in the issuer’s capital structure. The seniority classifications assigned to loans are senior secured, second lien and subordinate. Senior secured consists of loans that are the most senior debt in an issuer’s capital structure and therefore have a lower estimated loss severity than other debt that is subordinate to the senior secured loan. Senior secured loans often have a first lien on some or all of the issuer’s assets. Second lien consists of loans that are secured by a second lien interest on some or all of the issuer’s assets; however, the loan is subordinate to the first lien debt in the issuer’s capital structure. Subordinate consists of loans that are generally unsecured and subordinate to other debt in the issuer’s capital structure.

There are three internally assigned risk grades that are applied to loans that have not been identified as being impaired: high, moderate and low. High risk means that there is evidence of possible loss due to the financial or operating performance and liquidity of the issuer, industry or economic concerns specific to the issuer, or other factors that indicate that the breach of a covenant contained in the related loan agreement is possible. Moderate risk means that while there is not observable evidence of possible loss, there are issuer- and/or industry-specific trends that indicate a loss may have occurred. Low risk means that while there is no identified evidence of loss, there is the risk of loss inherent in the loan that has not been identified. All loans held for investment, with the exception of loans that have been identified as impaired, are assigned a risk grade of high, moderate or low.

We apply a range of default and loss severity estimates in order to estimate a range of loss outcomes upon which to base our estimate of probable losses that results in the determination of the unallocated component of our allowance for loan losses.

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As of September 30, 2013, the allocated component of our allowance for loan losses totaled $132.8 million and relates to investments in certain loans issued by four issuers with an aggregate par amount of $594.5 million and an aggregate recorded investment of $554.5 million. As of December 31, 2012, the allocated component of our allowance for loan losses totaled $94.9 million and relates to investments in certain loans issued by six issuers with an aggregate par amount of $484.1 million and an aggregate recorded investment of $445.4 million.

The unallocated component of our allowance for loan losses totaled $79.8 million and $128.6 million as of September 30, 2013 and December 31, 2012, respectively. As discussed above, we estimate the unallocated reserve by first categorizing our corporate loans held for investment portfolio based on their assigned risk grade and then based on the seniority of the loan in the issuer’s capital structure. Of the three internally assigned risk grades, as of September 30, 2013, we had loans issued from two issuers with an aggregate par value of $325.1 million and amortized cost amount of $324.9 million that we classified as high risk. The amortized cost balance of loans classified as high risk consisted of the following holdings: (i) $314.0 million amortized cost amount of loans issued by Modular Space Corporation and (ii) $10.9 million amortized cost amount of loans issued by Ambea AB.

At September 30, 2012, we transferred Texas Competitive Electric Holdings Company LLC (“TXU”), from the high risk grade of the unallocated component to the allocated component of our allowance for loan losses upon determination that the loans were impaired. Management believed it probable that we would be unable to collect all payments due in accordance with the contractual terms of the loan agreement. To calculate the recovery value of the loans, we estimated the loss as being the difference between our current cost basis of the loan, including accrued interest receivable, and the present value of expected future cash flows discounted using the effective discount rate. At September 30, 2013, the calculation resulted in a specific reserve of $69.5 million related to TXU, or an implied recovery value of approximately 75% of par. As of September 30, 2013, TXU had a total amortized cost of $311.6 million. In addition, we held TXU loans held for sale with a recorded investment of $29.8 million as of September 30, 2013.

During the three and nine months ended September 30, 2013, we recorded charge-offs totaling zero and $31.3 million comprised primarily of loans modified in TDRs, respectively. During the three and nine months ended September 30, 2012, we recorded charge-offs totaling $9.9 million and $12.0 million, respectively, comprised primarily of loans transferred to loans held for sale.

Loans Held For Sale and the Lower of Cost or Fair Value Adjustment

The following table summarizes the changes in our loans held for sale balance for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30,2013			For the three months ended September 30,2012			For the nine months ended September 30,2013			For the nine months ended September 30,2012
Loans Held for Sale:
Beginning balance	$	117,538		$	183,934		$	128,289		$	317,332
Transfers in	239,200			23,955			316,003			86,969
Transfers out	—			(48,992		)	—			(114,871		)
Sales, paydowns, restructurings and other	(41,634		)	(28,309		)	(120,538		)	(152,778		)
Lower of cost or estimated fair value adjustment(1)	(2,792		)	7,358			(11,442		)	1,294
Net carrying value	$	312,312		$	137,946		$	312,312		$	137,946

(1)Represents the recorded net adjustment to earnings for the respective period.

As of September 30, 2013, we had $312.3 million of loans held for sale, an increase of $184.0 million from December 31, 2012 primarily due to the transfer of certain loans from held for investment to loans held for sale.

During the three and nine months ended September 30, 2013, we transferred $239.2 million and $316.0 million amortized cost amount, respectively, of loans from held for investment to held for sale. During the three and nine months ended September 30, 2012, we transferred $24.0 million and $87.0 million, respectively, of loans from held for investment to held for sale. The transfers of certain loans to held for sale were due to our determination that credit quality of a loan in relation to its expected risk-adjusted return no longer met our investment objective and our determination to reduce or eliminate the exposure for certain loans as part of our portfolio risk management practices. Also, during both the three and nine months ended September 30, 2013, we did not transfer any loans from held for sale back to loans held for investment. During the three and nine months ended September 30, 2012, we transferred $49.0 million and $114.9 million amortized cost amount, respectively, from loans held for sale back to loans held for investment as the circumstances that led to the initial transfer to held for sale were no longer present. Such circumstances include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby we determined that selling the asset no longer met our investment objective and strategy.

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The following table summarizes the changes in the lower of cost or estimated fair value adjustment for our corporate loans held for sale portfolio for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30,2013			For the three months ended September 30, 2012			For the nine months ended September 30,2013			For the nine months ended September 30,2012
Lower of cost or estimated fair value:
Beginning balance	$	(22,069	)	$	(55,914	)	$	(14,047	)	$	(50,906	)
Sale, paydown and restructure of loans held for sale	18			37,643			646			38,264
Transfer of loans to held for investment	—			2,578			—			3,014
Declines in estimated fair value	(2,792		)	(219		)	(15,457		)	(21,886		)
Recoveries in estimated fair value	—			5,816			4,015			21,418
Ending balance	$	(24,843	)	$	(10,096	)	$	(24,843	)	$	(10,096	)

We recorded a $2.8 million and $11.4 million net charge to earnings for the three and nine months ended September 30, 2013, respectively, for the lower of cost or estimated fair value adjustment for certain loans held for sale, which had a carrying value of $312.3 million as of September 30, 2013. We recorded a $7.4 million and $1.3 million reduction to the lower of cost or estimated fair value adjustment during the three and nine months ended September 30, 2012, respectively, for certain loans held for sale, which had a carrying value of $137.9 million as of September 30, 2012.

Concentration Risk

Our corporate loan portfolio has certain credit risk concentrated in a limited number of issuers. As of September 30, 2013, approximately 47% of the total amortized cost basis of our corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by TXU, Modular Space Corporation and U.S. Foods Inc., which combined represented $935.8 million or approximately 15% of the aggregated amortized cost basis of our corporate loans. As of December 31, 2012, approximately 46% of the total amortized cost basis of our corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foods Inc., TXU and Modular Space Corporation, which combined represented $1.0 billion, or approximately 16% of the aggregated amortized cost basis of our corporate loans.

Corporate Debt Securities

Our corporate debt securities portfolio had an aggregate par value of $458.9 million and $466.1 million as of September 30, 2013 and December 31, 2012, respectively. Our corporate debt securities portfolio consists of debt obligations of corporations, partnerships and other entities in the form of senior secured, senior unsecured and subordinated bonds. Our corporate debt securities are included in securities on our condensed consolidated balance sheets.

The following table summarizes our corporate debt securities portfolio stratified by type as of September 30, 2013 and December 31, 2012:

Corporate Debt Securities

(Amounts in thousands)

	September 30, 2013(1)								December 31, 2012(1)
	Par		Carrying Value		Amortized Cost		Estimated Fair Value		Par		Carrying Value		Amortized Cost		Estimated Fair Value
Senior secured	$	202,865	$	185,226	$	178,355	$	185,226	$	218,872	$	211,716	$	201,360	$	211,716
Senior unsecured	223,480		221,124		202,094		221,124		191,737		183,003		169,961		183,003
Subordinated	32,536		33,939		30,751		33,939		55,453		54,959		51,491		54,959
Total	$	458,881	$	440,289	$	411,200	$	440,289	$	466,062	$	449,678	$	422,812	$	449,678

(1)In addition to certain corporate debt securities available-for-sale, these amounts include other corporate debt securities carried at estimated fair value, which have unrealized gains and losses recorded in the condensed consolidated statements of operations.

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As of September 30, 2013, $414.6 million par amount, or 90.3%, of our corporate debt securities portfolio was fixed rate and $44.3 million par amount, or 9.7%, was floating rate. In addition, as of September 30, 2013, $27.3 million par amount, or 6.0%, of our corporate debt securities portfolio, was denominated in foreign currencies, of which 85.9% was denominated in Euros. As of December 31, 2012, $395.4 million, or 84.8%, of our corporate debt securities portfolio was fixed rate and $70.7 million, or 15.2%, was floating rate. In addition, as of December 31, 2012, $21.5 million par amount, or 4.6%, of our corporate debt securities portfolio, was denominated in foreign currencies, of which 81.8% was denominated in Euros.

As of September 30, 2013, our fixed rate corporate debt securities had a weighted average coupon of 8.1% and a weighted average years to maturity of 5.3 years, as compared to 9.2% and 4.6 years, respectively, as of December 31, 2012. As of September 30, 2013 and December 31, 2012, our fixed rate corporate debt securities included $37.7 million and $14.2 million par amount of zero-coupon securities, respectively. All of our floating rate corporate debt securities have index reset frequencies of less than twelve months. The weighted average coupon on our floating rate corporate debt securities was 10.5% as of September 30, 2013 and 8.2% as of December 31, 2012, and the weighted average coupon spread to LIBOR of our floating rate corporate debt securities was 9.5% as of September 30, 2013 and 7.3% as of December 31, 2012. The weighted average years to maturity of our floating rate corporate debt securities was 3.2 years and 3.0 years as of September 30, 2013 and December 31, 2012, respectively.

During the three and nine months ended September 30, 2013, we recorded $5.0 million and $17.5 million, respectively, of impairment losses for corporate debt securities that we determined to be other-than-temporarily impaired. Comparatively, during the three and nine months ended September 30, 2012, we recorded $7.4 million and $8.2 million, respectively, of impairment losses for corporate debt securities that we determined to be other-than-temporarily impaired. These securities were determined to be other-than-temporarily impaired either due to our determination that recovery in value was no longer likely or because we decided to sell the respective security in response to specific credit concerns regarding the issuer.

As of September 30, 2013, we had a corporate debt security from one issuer in default with an estimated fair value of $23.6 million, which was on non-accrual status. As of December 31, 2012, we had no corporate debt securities in default.

Concentration Risk

Our corporate debt securities portfolio has certain credit risk concentrated in a limited number of issuers. As of September 30, 2013, approximately 50% of the estimated fair value of our corporate debt securities portfolio was concentrated in ten issuers, with the three largest concentrations of debt securities in securities issued by NXP Semiconductor NV, Avaya, Inc. and Catalina Marketing Corp, which combined represented $82.9 million, or approximately 19% of the estimated fair value of our corporate debt securities. As of December 31, 2012, approximately 51% of the estimated fair value of our corporate debt securities was concentrated in ten issuers, with the three largest concentrations of corporate debt securities issued by Sanmina Corporation, Avaya Inc. and iPayment, Inc., which combined represented $87.0 million, or approximately 19% of the estimated fair of value of our corporate debt securities.

Other Holdings

Our other holdings primarily consist of working and royalty interests, marketable and private equity investments, as well as interests in joint ventures and partnerships.

Natural Resources Holdings

Our natural resources properties are located in the United States, in the operating regions of the Barnett Shale, Eagle Ford Shale and other parts of Louisiana, Mississippi and Texas.

Working Interests

Our natural resources holdings include non-operated working interests in producing oil and natural gas fields located in Louisiana, Mississippi and Texas. As of September 30, 2013 and December 31, 2012, the working interests had a net carrying value of $335.3 million and $249.7 million, respectively. These interests are in proved developed, proved undeveloped and unproved properties, with the majority of our exposure to natural gas, followed by oil and then NGL. The acquisition of certain working interests was partially financed with borrowings through our 2015 Natural Resources Facility, which had $48.5 million outstanding as of September 30, 2013.

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During 2013, we funded approximately $83.1 million for new and existing transactions, including the purchase of an interest in certain undeveloped Eagle Ford acreage in Texas for future development.

During 2012, we executed several transactions through which we funded approximately $179.7 million, including transaction costs, for: (i) acquisitions of certain oil and natural gas properties located in Louisiana, Mississippi and Texas (most notably in the Barnett Shale and Eagle Ford Shale), which included proved reserves as of the acquisition date, (ii) agreements providing the rights to participate and earn working interest in oil and natural gas wells and acreage in the Permian Basin in Texas whereby we will provide development capital for drilling in exchange for working interests in the wells and acreage being developed and (iii) an agreement providing us with the rights to participate and earn working interest in oil and natural gas wells in the Eagle Ford Shale in Texas whereby we will provide development capital for drilling in exchange for working interests in the wells being developed.

Royalty Interests

In addition to natural resources working interests, we own overriding royalty interests in acreage located in south Texas. The overriding royalty interests include producing oil and natural gas properties. We have approximately 331 and 220 gross productive wells as of September 30, 2013 and December 31, 2012, respectively, in which we own an overriding royalty interest only, and the acreage is still under development. The overriding royalty interest properties are operated by unaffiliated third parties and as of September 30, 2013 and December 31, 2012, had net carrying values of $42.9 million and $47.3 million, respectively.

Equity Holdings

Equity investments carried at estimated fair value primarily consist of private equity investments. As of September 30, 2013, our equity investments consisted of (i) private equity investments carried at cost (included in other assets on our condensed consolidated balance sheet) with an aggregate cost amount of $0.4 million and an estimated fair value of $2.6 million and (ii) equity investments carried at estimated fair value, with an aggregate cost amount of $156.1 million and an estimated fair value of $191.2 million. In comparison, as of December 31, 2012, our equity investments consisted of (i) private equity investments carried at cost (included in other assets on our condensed consolidated balance sheet) with an aggregate cost amount of $0.4 million and an estimated fair value of $1.6 million and (ii) equity investments carried at estimated fair value, with an aggregate cost amount of $140.7 million and an estimated fair value of $161.6 million.

Interests in Joint Ventures and Partnerships Holdings

As of September 30, 2013, our interests in joint ventures and partnerships, which primarily hold assets related to commercial real estate, natural resources and specialty lending, had an aggregate cost amount of $319.0 million and estimated fair value of $332.9 million. As of December 31, 2012, our interests in joint ventures and partnerships had an aggregate cost amount of $137.6 million and estimated fair value of $142.5 million.

Shareholders’ Equity

Our shareholders’ equity at September 30, 2013 and December 31, 2012 totaled $2.5 billion and $1.8 billion, respectively. Included in our shareholders’ equity as of September 30, 2013 and December 31, 2012 is accumulated other comprehensive loss totaling $29.7 million and $70.2 million, respectively.

Our average common shareholders’ equity and return on average common shareholders’ equity for the three and nine months ended September 30, 2013 was $2.1 billion and 6.1% and $2.1 billion and 13.1%, respectively. Our average shareholders’ equity and return on average shareholders’ equity for the three and nine months ended September 30, 2012 was $1.8 billion and 25.4% and $1.8 billion and 20.6%, respectively. Return on average common shareholders’ equity is defined as net income available to common shareholders divided by weighted average common shareholders’ equity.

Our book value per common share as of September 30, 2013 and December 31, 2012 was $10.42 and $10.31, respectively, and was computed based on 204,824,159 and 178,437,078 common shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively.

Distributions

Preferred Shareholders

On September 24, 2013, our board of directors declared a cash distribution of $0.460938 per share on our Series A LLC Preferred Shares. The distribution was paid on October 15, 2013 to preferred shareholders as of the close of business on October 8, 2013.

On June 26, 2013, our board of directors declared a cash distribution of $0.460938 per share on our Series A LLC Preferred Shares. The distribution was paid on July 15, 2013 to preferred shareholders as of the close of business on July 8, 2013.

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On March 26, 2013, our board of directors declared a cash distribution of $0.450694 per share on our outstanding Series A LLC Preferred Shares. The distribution was paid on April 15, 2013 to preferred shareholders of record as of the close of business on April 8, 2013.

Common Shareholders

On October 23, 2013, our board of directors declared a cash distribution for the quarter ended September 30, 2013 of $0.22 per share to common shareholders of record on November 6, 2013. The distribution is payable on November 20, 2013.

On July 23, 2013, our board of directors declared a cash distribution for the quarter ended June 30, 2013 of $0.21 per share to common shareholders of record on August 6, 2013. The distribution was paid on August 20, 2013.

On April 30, 2013, our board of directors declared a cash distribution for the quarter ended March 31, 2013 of $0.21 per share to common shareholders of record on May 14, 2013. The distribution was paid on May 28, 2013.

On January 31, 2013, our board of directors declared a cash distribution for the quarter ended December 31, 2012 of $0.21 per share to common shareholders of record on February 19, 2013. The distribution was paid on February 28, 2013. Also, on January 31, 2013, our board of directors declared a special cash distribution for the year ended December 31, 2012 of $0.05 per share to common shareholders of record on March 14, 2013. The distribution was paid on March 28, 2013.

Common Shares and Restricted Shares

On August 9, 2013, the Compensation Committee of our board of directors granted to our non-employee directors 39,288 restricted common shares subject to graded vesting over three years with the final vesting date of August 9, 2016.

On March 1, 2013, we repurchased and cancelled 25,204 of our common shares in connection with the satisfaction of tax withholding obligations related to common shares previously awarded to certain of our officers and vesting on that date. Also on the same date, we issued 30,000 shares in connection with funding this repurchase.

On February 14, 2013, the Compensation Committee of our board of directors granted our Manager 292,009 restricted common shares subject to graded vesting over three years with the final vesting date of March 1, 2016.

During the first quarter of 2013, $172.5 million of our 7.5% convertible senior notes due January 15, 2017 (“7.5% Notes”) had been tendered for conversion, which were settled with 26.1 million shares. See “Sources of Funds” below for further discussion.

LIQUIDITY AND CAPITAL RESOURCES

We actively manage our liquidity position with the objective of preserving our ability to fund our operations and fulfill our commitments on a timely and cost-effective basis. Although we believe our current sources of liquidity are adequate to preserve our ability to fund our operations and fulfill our commitments, we will continue to evaluate opportunities to issue incremental capital. This may include taking advantage of market opportunities to issue equity or refinance or replace indebtedness, including the issuance of new debt securities and retiring debt pursuant to privately negotiated transactions, open market purchases or otherwise. As of September 30, 2013, we had unrestricted cash and cash equivalents totaling $222.0 million.

The majority of our investments are held in Cash Flow CLOs. Accordingly, the majority of our cash flows have historically been received from our investments in the mezzanine and subordinated notes of our Cash Flow CLOs. However, during the period in which a Cash Flow CLO is not in compliance with an over-collateralization (“OC Test”) as outlined in its respective indenture, the cash flows we would generally expect to receive from our Cash Flow CLO holdings are paid to the senior note holders of the Cash Flow CLOs. As described in further detail below, as of September 30, 2013, all of our Cash Flow CLOs were in compliance with their respective coverage tests (specifically, their OC Tests and interest coverage (“IC”) tests) and made cash distributions to mezzanine and/or subordinate note holders, including us.

Sources of Funds

Senior Notes Offerings

On March 20, 2012, we issued $115.0 million par amount of 7.500% senior notes due March 20, 2042 (“7.500% Senior Notes”), resulting in net proceeds of $111.4 million. The notes trade under the ticker symbol “KFI” on the NYSE. Interest on the 7.500% Senior Notes is payable quarterly in arrears on June 20, September 20, December 20 and March 20 of each year.

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Cash Flow CLO Transactions

As of September 30, 2013, we had eight Cash Flow CLO transactions outstanding. An affiliate of our Manager owns an interest in the junior notes of both CLO 2007-1 and CLO 2007-A. The aggregate carrying amount of the junior notes in CLO 2007-1 and CLO 2007-A held by the affiliate of our Manager is $193.9 million as of September 30, 2013 and is reflected as collateralized loan obligation junior secured notes to affiliates on our condensed consolidated balance sheets.

In accordance with GAAP, we consolidate each of our CLO subsidiaries as we have the power to direct the activities of these VIEs, as well as the obligation to absorb losses of the VIEs or the right to receive benefits of the VIEs that could potentially be significant to the VIEs. We utilize CLOs to fund our investments in corporate loans and corporate debt securities.

On September 27, 2013, we amended the CLO 2011-1 Agreement to upsize the transaction by $300.0 million, of which CLO 2011-1 is now able to borrow up to an incremental $225.0 million. Under the amended CLO 2011-1 Agreement, CLO 2011-1 matures on August 15, 2020 and borrowings under the CLO 2011-1 Agreement bear interest at a rate of three-month LIBOR plus 1.35%.

On June 25, 2013, we closed CLO 2013-1, a $519.4 million secured financing transaction maturing on July 15, 2025. We issued $458.5 million par amount of senior secured notes to unaffiliated investors, of which $442.0 million was floating rate with a weighted-average coupon of three-month LIBOR plus 1.67% and $16.5 million was fixed rate at 3.73%. The investments that are owned by CLO 2013-1 collateralize the CLO 2013-1 debt, and as a result, those investments are not available to us, our creditors or shareholders. According to the indenture, the first payment will commence in January 2014 and the effective date of CLO 2013-1 will commence by November 5, 2013 or earlier if certain portfolio targets are met.

On December 21, 2012, we closed CLO 2012-1, a $412.4 million secured financing transaction maturing December 16, 2024. We issued $367.5 million par amount of senior secured notes to unaffiliated investors, of which $342.5 million was floating rate with a weighted-average coupon of three-month LIBOR plus 2.09% and $25.0 million was fixed rate at 2.39%. We also issued $21.5 million of subordinated notes to unaffiliated third party investors. The investments that are owned by CLO 2012-1 collateralize the CLO 2012-1 debt, and as a result, those investments are not available to us, our creditors or shareholders. In accordance with the indenture, the first payment and effective date of CLO 2012-1 commenced in June and April 2013, respectively.

The indentures governing our Cash Flow CLOs include numerous compliance tests, the majority of which relate to the CLO’s portfolio.

In the case of CLO 2011-1, the agreement specifies a par value ratio test (“PVR Test”), whereby if the PVR Test is below 120.0%, up to 50% of all interest collections that otherwise are payable to us are used to amortize the senior loan amount outstanding by the lower of the amount required to bring the PVR Test into compliance and the outstanding loan amount. Similarly, if the PVR Test is below 120.0%, the principal collections that otherwise would be payable to us are used to amortize the senior loan amount outstanding by the lower of the amount required to bring the PVR Test into compliance and the outstanding loan amount. For purposes of the calculation, collateral value is the par value of the assets unless an asset is in default or is a CCC-rated asset in excess of the CCC-rated asset limit percentage specified for CLO 2011-1, in which case the collateral value of such asset is the market value of such asset.

The following table summarizes the PVR Test for CLO 2011-1. This information is based on the September 2013 monthly report which is prepared by the independent third party trustee for CLO 2011-1:

(dollar amounts in thousands)	CLO 2011-1
Portfolio total	$	321,552
Par value test minimum	120.0		%
Par value test ratio	161.4		%
Cushion / (Excess)	$	110,165
Par value portfolio collateral value	$	429,685
Outstanding loan balance	$	266,266

In the case of our other Cash Flow CLOs, which vary from CLO 2011-1’s compliance tests, in the event that a portfolio profile test is not met, the indenture places restrictions on the ability of the CLO’s manager to reinvest available principal proceeds generated by the collateral in the CLOs until the specific test has been cured. In addition to the portfolio profile tests, the indentures for these CLOs include OC Tests which set the ratio of the collateral value of the assets in the CLO to the tranches of debt for which the test is being measured, as well as interest coverage tests. For purposes of the calculation, collateral value is the par value of the assets unless an asset is in default, is a discounted obligation, or is a CCC-rated asset in excess of the percentage of CCC-rated asset limit specified for each CLO.

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If an asset is in default, the indenture for each CLO transaction defines the value used to determine the collateral value, which value is the lower of the market value of the asset or the recovery value proscribed for the asset based on its type and rating by Standard & Poor’s or Moody’s.

A discount obligation is an asset with a purchase price of less than a particular percentage of par. The discount obligation amounts are specified in each CLO and are generally set at a purchase price of less than 80% of par for corporate loans and 75% of par for corporate debt securities.

The indenture for each CLO specifies a CCC-threshold for the percentage of total assets in the CLO that can be rated CCC. All assets in excess of the CCC threshold specified for the respective CLO are also included in the OC Tests at market value and not par.

Defaults of assets in CLOs, ratings downgrade of assets in CLOs to CCC, price declines of CCC assets in excess of the proscribed CCC threshold amount, and price declines in assets classified as discount obligations may reduce the over-collateralization ratio such that a CLO is not in compliance. If a CLO is not in compliance with an OC Test, cash flows normally payable to the holders of junior classes of notes will be used by the CLO to amortize the most senior class of notes until such point as the OC Test is brought back into compliance. While being out of compliance with an OC Test would not impact our investment portfolio or results of operations, it would impact our unrestricted cash flows available for operations, new investments and cash distributions. As of September 30, 2013, all of our CLOs were in compliance with their respective OC Tests. The following table summarizes several of the material tests and metrics for each of our CLOs. This information is based on the September 2013 monthly reports, which are prepared by the independent third party trustee for each CLO:

·Investments: The par value of the investments in each CLO plus principal cash in the CLO.

·Senior IC ratio minimum: Minimum required ratio of interest income earned on investments to interest expense on the senior debt issued by the CLO per the respective CLO’s indenture.

·Actual senior IC ratio: The ratio is interest income earned on the investments divided by interest expense on the senior debt issued by the CLO.

·CCC amount: The par amount of assets rated CCC or below (excluding defaults, if any).

·CCC threshold percentage: Maximum amount of assets in portfolio that are rated CCC without being subject to being valued at fair value for purposes of the OC Tests.

·Senior OC Test minimum: Minimum senior over-collateralization requirement per the respective CLO’s indenture.

·Actual senior OC Test: Actual senior over-collateralization amount as of the September 2013 report date.

·Actual cushion / (excess): Dollar amount that over-collateralization test is being passed, cushion, or failed (excess).

·Subordinated OC Test minimum: Minimum subordinated over-collateralization requirement per the respective CLO’s indenture.

·Actual subordinated OC Test: Actual subordinated over-collateralization amount as of the September 2013 report date.

·Subordinate cushion / (excess): Dollar amount that the OC Test is being passed, cushion, or failed (excess).

(dollar amounts in thousands)	CLO 2005-1			CLO 2005-2			CLO 2006-1			CLO 2007-1			CLO 2007-A			CLO 2012-1			CLO 2013-1
Investments	$	399,462		$	534,571		$	765,768		$	3,363,619		$	760,457		$	400,568		$	503,243
Senior IC ratio minimum	115.0		%	125.0		%	115.0		%	115.0		%	120.0		%	115.0		%	115.0		%
Actual senior IC ratio	761.6		%	1,155.1		%	426.9		%	555.6		%	812.2		%	284.1		%	242.7		%
CCC amount	$	72,835		$	84,647		$	147,371		$	422,847		$	151,218		$	996		$	7,180
CCC percentage of portfolio	18.2		%	15.8		%	19.2		%	12.6		%	19.9		%	0.2		%	1.4		%
CCC threshold percentage	5.0		%	7.5		%	7.5		%	7.5		%	7.5		%	7.5		%	7.5		%
Senior OC Test minimum	119.4		%	123.0		%	143.1		%	159.1		%	119.7		%	113.2		%	114.5		%
Actual senior OC Test	265.7		%	180.6		%	213.0		%	181.5		%	197.2		%	121.4		%	123.3		%
Cushion / (Excess)	$	206,999		$	164,686		$	231,521		$	398,265		$	274,951		$	27,008		$	36,083
Subordinated OC Test minimum	106.2		%	106.9		%	114.0		%	120.1		%	109.9		%	n/a			n/a
Actual subordinated OC Test	138.0		%	135.9		%	161.9		%	126.4		%	132.8		%	n/a			n/a
Cushion / (Excess)	$	86,555		$	110,226		$	208,744		$	161,549		$	120,674		n/a			n/a

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During the three and nine months ended September 30, 2012, we issued $59.5 million par amount and $119.0 million par amount, respectively, of CLO 2007-1 class D notes for proceeds of $49.4 million and $94.5 million, respectively. In addition, during the three and nine months ended September 30, 2012, we issued zero and $11.3 million par amount, respectively, of CLO 2007-A class C notes for proceeds of $10.6 million.

Credit Facilities

Senior Secured Credit Facility

On November 30, 2012, we entered into a credit agreement for a three-year $150.0 million revolving credit facility, maturing on November 30, 2015. We may obtain additional commitments under the 2015 Facility so long as the aggregate amount of commitments at any time does not exceed $350.0 million. We have the right to prepay loans under the 2015 Facility in whole or in part at any time. In connection with entering into the 2015 Facility, we terminated the commitments under our prior asset-based revolving credit facility. Loans under the 2015 Facility bear interest at a rate equal to, at our option, LIBOR plus 2.25% per annum, or an alternate base rate plus 1.25% per annum. The 2015 Facility contains customary covenants, including ones that require us to satisfy a net worth financial test and maintain certain ratios relating to leverage and consolidated total assets. In addition, the 2015 Facility contains customary negative covenants applicable to us.

As of September 30, 2013, we had no borrowings outstanding under the 2015 Facility.

Asset-Based Borrowing Facilities

On May 15, 2013, our 2015 Natural Resources Facility, maturing on November 5, 2015, was adjusted and reduced to $100.9 million, that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified oil and gas assets. The borrowing base is subject to certain caps and concentration limits customary for financings of this type. We have the right to prepay loans under the 2015 Natural Resources Facility in whole or in part at any time. Loans under the 2015 Natural Resources Facility bear interest at a rate equal to LIBOR plus a tiered applicable margin ranging from 1.75% to 2.75% per annum. The 2015 Natural Resources Facility contains customary covenants applicable to us. As of September 30, 2013, we had $48.5 million of borrowings outstanding under the 2015 Natural Resources Facility.

In addition, on February 27, 2013, we entered into a separate credit agreement for a five-year $6.0 million non-recourse, asset-based revolving credit facility, maturing on February 27, 2018 (the “2018 Natural Resources Facility”), that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified oil and gas assets. On August 1, 2013, the 2018 Natural Resources Facility was adjusted and increased to $20.0 million. We have the right to prepay loans under the 2018 Natural Resources Facility in whole or in part at any time. Loans under the 2018 Natural Resources Facility bear interest at a rate equal to LIBOR plus a tiered applicable margin ranging from 1.75% to 3.25% per annum. The 2018 Natural Resources Facility contains customary covenants applicable to us. As of September 30, 2013, we had no borrowings outstanding under the 2018 Natural Resources Facility.

As of September 30, 2013, we believe we were in compliance with the covenant requirements for our credit facilities discussed above.

Convertible Debt

In 2010, we issued $172.5 million of 7.5% Notes, which will mature on January 15, 2017 unless previously redeemed, repurchased or converted in accordance with their terms prior to such date. As of December 31, 2012, holders of the 7.5% Notes had the ability to convert their notes at the applicable conversion rate at any time prior to the close of business on the business day immediately preceding the stated maturity date subject to our right to terminate the conversion rights of the notes. On January 18, 2013, in accordance with the indenture relating to the 7.5% Notes, we issued a Termination Notice to holders of the 7.5% Notes whereby we terminated the right to convert the 7.5% Notes to common shares. Per the indenture, we were able to terminate the conversion rights of the notes if the closing price of our shares exceeded 150% of the conversion price then in effect for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day prior to the date on which we provide notice of the election to terminate the conversion rights. Holders of $172.5 million 7.5% Notes submitted their notes for conversion for which we satisfied by physical settlement with 26.1 million common shares, or 151.0580 shares per $1,000 principal amount of 7.5% Notes. As set forth in the Termination Notice, the 7.5% Notes were no longer convertible to common shares as of February 17, 2013.

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During the first quarter of 2012, we repurchased $23.1 million par amount of our 7.0% convertible senior notes due July 15, 2012 (“7.0% Notes”). These transactions resulted in us recording a loss of $0.4 million and a $0.2 million write-off of unamortized debt issuance costs. On July 13, 2012, we repaid in full our $112.0 million of outstanding 7.0% Notes, which matured on July 15, 2012.

Perpetual Preferred Offering

On January 17, 2013, we issued 14.95 million of Series A LLC Preferred Shares for gross proceeds of $373.8 million, and net proceeds of $362.0 million. The Series A LLC Preferred Shares trade on the NYSE under the ticker symbol “KFN.PR” and began trading on January 28, 2013. Distributions on the Series A LLC Preferred Shares are cumulative and are payable, when, as, and if declared by our board of directors, quarterly on January 15, April 15, July 15 and October 15 of each year, beginning April 15, 2013, at a rate per annum equal to 7.375%.

Off-Balance Sheet Commitments

As of September 30, 2013, we had committed to purchase corporate loans with an aggregate par amount totaling $209.7 million. In addition, we participate in certain financing arrangements, whereby we are committed to provide funding of up to a specific predetermined amount at the discretion of the borrower or have entered into an agreement to acquire interests in certain assets. As of September 30, 2013, we had unfunded financing commitments totaling $5.0 million for corporate loans.

We participate in joint ventures and partnerships alongside KKR and its affiliates through which we contribute capital for assets, including development projects related to our interests in joint ventures and partnerships that hold commercial real estate and natural resources investments, as well as specialty lending focused businesses. We estimated these future contributions to range from approximately $290 million to $300 million as of September 30, 2013, whereby approximately 22% was related to our natural resources segment, 52% was related to our credit segment and 26% was related to our other segment.

As of September 30, 2013, we had investments, held alongside KKR and its affiliates, in real estate entities that were financed with non-recourse debt totaling $231.7 million. Under non-recourse debt, the lender generally does not have recourse against any other assets owned by the borrower or any related parties of the borrower, except for certain specified exceptions listed in the respective loan documents including customary “bad boy” acts. In connection with these investments, joint and several non-recourse “bad boy” guarantees were provided for losses relating solely to specified bad faith acts that damage the value of the real estate being used as collateral. As of September 30, 2013, we also had financial guarantees related to our natural resources investments totaling $17.9 million.

PARTNERSHIP TAX MATTERS

Non-Cash “Phantom” Taxable Income

We intend to continue to operate so that we qualify, for United States federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. Holders of our shares are subject to United States federal income taxation and generally other taxes, such as state, local and foreign income taxes, on their allocable share of our taxable income, regardless of whether or when they receive cash distributions. In addition, certain of our investments, including investments in foreign corporate subsidiaries, CLO issuers (which are treated as partnerships, disregarded entities or foreign corporations for United States federal income tax purposes), partnerships generally and debt securities, may produce taxable income without corresponding distributions of cash to us or may produce taxable income prior to or following the receipt of cash relating to such income. In addition, we have recognized and may recognize in the future cancellation of indebtedness income upon the retirement of our debt at a discount. We generally allocate our taxable income and loss using a monthly convention, which means that we determine our taxable income and losses for the taxable year to be allocated to our shares and then prorate that amount on a monthly basis. If the amount of cash distributed to our Series A LLC Preferred Shares in any year exceeds our gross ordinary income for such year, additional gross ordinary income will be allocated to the Series A LLC Preferred Shares in future years until such excess is eliminated. Consequently, in some taxable years, holders of our shares may recognize taxable income in excess of our cash distributions.

Furthermore, even if we did not pay cash distributions with respect to a taxable year, holders of our common shares may still have a tax liability attributable to their allocation of taxable income from us during such year.

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Qualifying Income Exception

We intend to continue to operate so that we qualify, for United States federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. In general, if a partnership is “publicly traded” (as defined in the Code), it will be treated as a corporation for United States federal income tax purposes. A publicly traded partnership will be taxed as a partnership, however, and not as a corporation, for United States federal income tax purposes so long as it is not required to register under the Investment Company Act and at least 90% of its gross income for each taxable year constitutes “qualifying income” within the meaning of Section 7704(d) of the Code. We refer to this exception as the “qualifying income exception.” Qualifying income generally includes rents, dividends, interest (to the extent such interest is neither derived from the “conduct of a financial or insurance business” nor based, directly or indirectly, upon “income or profits” of any person), income and gains derived from certain activities related to minerals and natural resources, and capital gains from the sale or other disposition of stocks, bonds and real property. Qualifying income also includes other income derived from the business of investing in, among other things, stocks and securities.

If we fail to satisfy the “qualifying income exception” described above, items of income, gain, loss, deduction and credit would not pass through to holders of our shares and such holders would be treated for United States federal (and certain state and local) income tax purposes as shareholders in a corporation. In such case, we would be required to pay income tax at regular corporate rates on all of our net income. In addition, we would likely be liable for state and local income and/or franchise taxes on all of our income. Distributions to holders of our shares would constitute ordinary dividend income taxable to such holders to the extent of our earnings and profits, and these distributions would not be deductible by us. If we were taxable as a corporation, it could result in a material reduction in cash flow and after-tax return for holders of our shares and thus could result in a substantial reduction in the value of our shares and any other securities we may issue.

Tax Consequences of Investments in Natural Resources and Real Estate

As referenced above, we have made and may make certain investments in natural resources and real estate. It is likely that the income from natural resources investments will be treated as effectively connected with the conduct of a United States trade or business with respect to holders of our shares that are not “United States persons” within the meaning of Section 7701(a)(30) of the Code. Furthermore, any notional principal contracts that we enter into, if any, in connection with investments in natural resources likely would generate income that would be treated as effectively connected with the conduct of a United States trade or business. In addition, if any REIT subsidiary in which we own an interest recognizes gain on the disposition of a United States real property interest, or if we recognize gain on the disposition of a United States real property interest that we hold through a pass-through entity (including gain from the sale of stock in a REIT subsidiary that invests primarily in real estate), such gain will be treated as effectively connected with the conduct of a United States trade or business. Further, our investments in real estate through pass-through entities may generate operating income that is treated as effectively connected with the conduct of a United States trade or business.

To the extent our income is treated as effectively connected income, a holder who is a non-United States person generally would be required to (i) file a United States federal income tax return for such year reporting its allocable share, if any, of our income or loss effectively connected with such trade or business and (ii) pay United States federal income tax at regular United States tax rates on any such income. Moreover, if such a holder is a corporation, it might be subject to a United States branch profits tax on its allocable share of our effectively connected income. In addition, distributions to such a holder would be subject to withholding at the highest applicable federal income tax rate to the extent of the holder’s allocable share of our effectively connected income. Any amount so withheld would be creditable against such holder’s United States federal income tax liability, and such holder could claim a refund to the extent that the amount withheld exceeded such holder’s United States federal income tax liability for the taxable year.

If we are engaged in a United States trade or business, a portion of any gain recognized by an investor who is a non-United States person on the sale or exchange of its shares may be treated for United States federal income tax purposes as effectively connected income, and hence such holder may be subject to United States federal income tax on the sale or exchange. Moreover, if the fair market value of our investments in United States real property interests, which include our investments in natural resources, real estate and REIT subsidiaries that invest primarily in real estate, represent more than 10% of the total fair market value of our assets, our shares could be treated as United States real property interests. In such case, gain recognized by an investor who is a non-United States person on the sale or exchange of its shares would be treated for United States federal income tax purposes as effectively connected income (unless the gain is attributable to a class of our shares that is regularly traded on a securities market and the non-United States person owns 5% or less of the shares of that class). We do not believe that the fair market value of our investments in United States real property interests represents more than 10% of the total fair market value of our assets at this time. No assurance can be provided that our future investments in United States real property interests will not cause us to exceed the 10% threshold described above. If gain from the sale of our shares is treated as effectively connected income, the holder may be subject to United States federal income and/or withholding tax on the sale or exchange.

In addition, all holders of our shares will likely have state tax filing obligations in jurisdictions in which we have made investments in natural resources or real estate (other than through a REIT subsidiary). As a result, holders of our shares will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions.

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Further, holders may be subject to penalties if they fail to comply with those requirements. Our current investments may cause our holders to have state tax filing obligations in the following states: Kansas, Louisiana, Mississippi, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia and Wyoming. We may make investments in other states or non-U.S. jurisdictions in the future.

For holders of our shares that are regulated investment companies, to the extent that our income from our investments in natural resources and real estate exceeds 10% of our gross income, then we will likely be treated as a “qualified publicly traded partnership” for purposes of the income and asset diversification tests that apply to regulated investment companies. We do not believe we were treated as a “qualified publicly traded partnership” for our 2012 tax year. However, because such qualification will depend on the nature of our future investments, no assurance can be provided that we will or will not be treated as a “qualified publicly traded partnership” in 2013 or any future year.

OUR INVESTMENT COMPANY ACT STATUS

Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is, holds itself out as being, or proposes to be, primarily engaged in the business of investing, reinvesting or trading in securities and Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” (within the meaning of the Investment Company Act) having a value exceeding 40% of the value of the issuer’s total assets (exclusive of United States government securities and cash items) on an unconsolidated basis (the “40% test”). Excluded from the term “investment securities” are, among others, securities issued by majority-owned subsidiaries unless the subsidiary is an investment company or relies on the exceptions from the definition of an investment company provided by Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act (a “fund”).

We are organized as a holding company. We conduct our operations primarily through our majority-owned subsidiaries. Each of our subsidiaries is either outside of the definition of an investment company in Sections 3(a)(1)(A) and 3(a)(1)(C), described above, or excepted from the definition of an investment company under the Investment Company Act. We believe that we are not, and that we do not propose to be, primarily engaged in the business of investing, reinvesting or trading in securities and we do not believe that we have held ourselves out as such. We intend to continue to conduct our operations so that we are not required to register as an investment company under the Investment Company Act.

We monitor our holdings regularly to confirm our continued compliance with the 40% test. In calculating our position under the 40% test, we are responsible for determining whether any of our subsidiaries is majority-owned. We treat as majority-owned subsidiaries for purposes of the 40% test entities, including those that issue CLOs, in which we own at least 50% of the outstanding voting securities or that are otherwise structured consistent with applicable SEC staff guidance. Some of our majority-owned subsidiaries may rely solely on the exceptions from the definition of “investment company” found in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. In order for us to satisfy the 40% test, our ownership interests in those subsidiaries or any of our subsidiaries that are not majority-owned for purposes of the Investment Company Act, together with any other “investment securities” that we may own, may not have a combined value in excess of 40% of the value of our total assets on an unconsolidated basis and exclusive of United States government securities and cash items. However, many of our majority-owned subsidiaries either fall outside of the general definitions of an investment company or rely on exceptions provided by provisions of, and rules and regulations promulgated under, the Investment Company Act (other than Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act) and, therefore, the securities of those subsidiaries that we own and hold are not investment securities for purposes of the Investment Company Act. In order to conform to these exceptions, these subsidiaries are limited with respect to the assets in which each of them can invest and/or the types of securities each of them may issue. We must, therefore, monitor each subsidiary’s compliance with its applicable exception and our freedom of action relating to such a subsidiary, and that of the subsidiary itself, may be limited as a result. For example, our subsidiaries that issue CLOs generally rely on the exception provided by Rule 3a-7 under the Investment Company Act, while our real estate subsidiaries, including those that are taxed as REITs for United States federal income tax purposes, generally rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act. Each of these exceptions requires, among other things that the subsidiary (i) not issue redeemable securities and (ii) engage in the business of holding certain types of assets, consistent with the terms of the exception. Similarly, any subsidiaries engaged in the ownership of oil and gas assets may, depending on the nature of the assets, be outside the definition of an investment company or rely on exceptions provided by Section 3(c)(5)(C) or Section 3(c)(9) of the Investment Company Act. While Section 3(c)(9) of the Investment Company Act does not limit the nature of the securities issued, it does impose business engagement requirements that limit the types of assets that may be held.

We do not treat our interests in majority-owned subsidiaries that are outside of the general definition of an investment company or that rely on Section 3(c)(5)(A), (B), (C) or Section 3(c)(9) of, or Rule 3a-7 under, the Investment Company Act as investment securities when calculating our 40% test.

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We sometimes refer to our subsidiaries that rely on Rule 3a-7 under the Investment Company Act as “CLO subsidiaries.” Rule 3a-7 under the Investment Company Act is available to certain structured financing vehicles that are engaged in the business of holding financial assets that, by their terms, convert into cash within a finite time period and that issue fixed income securities entitling holders to receive payments that depend primarily on the cash flows from these assets, provided that, among other things, the structured finance vehicle does not engage in certain portfolio management practices resembling those employed by management investment companies (e.g., mutual funds). Accordingly, each of these CLO subsidiaries is subject to an indenture (or similar transaction documents) that contains specific guidelines and restrictions limiting the discretion of the CLO subsidiary and its collateral manager. In particular, these guidelines and restrictions prohibit the CLO subsidiary from acquiring and disposing of assets primarily for the purpose of recognizing gains or decreasing losses resulting from market value changes. Thus, a CLO subsidiary cannot acquire or dispose of assets primarily to enhance returns to the owner of the equity in the CLO subsidiary; however, subject to this limitation, sales and purchases of assets may be made so long as doing so does not violate guidelines contained in the CLO subsidiary’s relevant transaction documents. A CLO subsidiary generally can, for example, sell an asset if the collateral manager believes that its credit quality has declined since its acquisition or that the credit profile of the obligor will deteriorate and the proceeds of permitted dispositions may be reinvested in additional collateral, subject to fulfilling the requirements set forth in Rule 3a-7 under the Investment Company Act and the CLO subsidiary’s relevant transaction documents. As a result of these restrictions, our CLO subsidiaries may suffer losses on their assets and we may suffer losses on our investments in those CLO subsidiaries.

We sometimes refer to our subsidiaries that rely on Section 3(c)(5)(C) of the Investment Company Act, as our “real estate subsidiaries.” Section 3(c)(5)(C) of the Investment Company Act is available to companies that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. While the SEC has not promulgated rules to address precisely what is required for a company to be considered to be “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate,” the SEC’s Division of Investment Management, or the “Division,” has taken the position, through a series of no-action and interpretive letters, that a company may rely on Section 3(c)(5)(C) of the Investment Company Act if, among other things, at least 55% of the company’s assets consist of mortgage loans, other assets that are considered the functional equivalent of mortgage loans and certain other interests in real property (collectively, “qualifying real estate assets”), and at least 25% of the company’s assets consist of real estate-related assets (reduced by the excess of the company’s qualifying real estate assets over the required 55%), leaving no more than 20% of the company’s assets to be invested in miscellaneous assets. The Division has also provided guidance as to the types of assets that can be considered qualifying real estate assets. Because the Division’s interpretive letters are not binding except as they relate to the companies to whom they are addressed, if the Division were to change its position as to, among other things, what assets might constitute qualifying real estate assets our REIT subsidiaries might be required to change its investment strategy to comply with the changed position. We cannot predict whether such a change would be adverse.

Based on current guidance, our real estate subsidiaries classify investments in mortgage loans as qualifying real estate assets, as long as the loans are “fully secured” by an interest in real estate on which we retain the unilateral right to foreclose. That is, if the loan-to-value ratio of the loan is equal to or less than 100%, then the mortgage loan is considered to be a qualifying real estate asset. Mortgage loans with loan-to-value ratios in excess of 100% are considered to be only real estate-related assets. Our real estate subsidiaries consider agency whole pool certificates to be qualifying real estate assets. Examples of agencies that issue whole pool certificates are the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. An agency whole pool certificate is a certificate issued or guaranteed as to principal and interest by the United States government or by a federally chartered entity, which represents the entire beneficial interest in the underlying pool of mortgage loans. By contrast, an agency certificate that represents less than the entire beneficial interest in the underlying mortgage loans is not considered to be a qualifying real estate asset, but is considered by our real estate subsidiaries to be a real estate-related asset.

Most non-agency mortgage-backed securities do not constitute qualifying real estate assets because they represent less than the entire beneficial interest in the related pool of mortgage loans; however, based on Division guidance, where our real estate subsidiaries’ investment in non-agency mortgage-backed securities is the “functional equivalent” of owning the underlying mortgage loans, our real estate subsidiaries may treat those securities as qualifying real estate assets. Moreover, investments in mortgage-backed securities that do not constitute qualifying real estate assets are classified by our real estate subsidiaries as real estate-related assets. Therefore, based upon the specific terms and circumstances related to each non-agency mortgage-backed security that our real estate subsidiaries own, our real estate subsidiaries will make a determination of whether that security should be classified as a qualifying real estate asset or as a real estate-related asset; and there may be instances where a security is recharacterized from being a qualifying real estate asset to a real estate-related asset, or conversely, from being a real estate-related asset to being a qualifying real estate asset based upon the acquisition or disposition or redemption of related classes of securities from the same securitization trust. If our real estate subsidiaries acquire securities that, collectively, receive all of the principal and interest paid on the related pool of underlying mortgage loans (less fees, such as servicing and trustee fees, and expenses of the securitization), and that subsidiary has unilateral foreclosure rights with respect to those mortgage loans, then our real estate subsidiaries will consider those securities, collectively, to be qualifying real estate assets. If another entity acquires any of the securities that are expected to receive cash flow from the underlying mortgage loans, then our real estate subsidiaries will consider whether it has appropriate foreclosure rights with respect to the underlying loans and whether its investment is a first loss position in deciding whether these securities should be classified as qualifying real estate assets. If our real estate subsidiaries own more than one subordinate class, then, to determine the classification of

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subordinate classes other than the first loss class, our real estate subsidiaries will consider whether such classes are contiguous with the first loss class (with no other classes absorbing losses after the first loss class and before any other subordinate classes that our real estate subsidiaries own), whether our real estate subsidiaries own the entire amount of each such class and whether our real estate subsidiaries would continue to have appropriate foreclosure rights in connection with each such class if the more subordinate classes were no longer outstanding. If the answers to any of these questions is no, then our real estate subsidiaries would expect not to classify that particular class, or classes senior to that class, as qualifying real estate assets.

We have made or may make oil and gas and other mineral investments that are held through one or more subsidiaries and would refer to those subsidiaries as our “oil and gas subsidiaries”. Depending upon the nature of the oil and gas assets held by an oil and gas subsidiary, such oil and gas subsidiary may rely on Section 3(c)(5)(C) or Section 3(c)(9) of the Investment Company Act or may fall outside of the general definition of an investment company. An oil and gas subsidiary that does not engage primarily, propose to engage primarily or hold itself out as engaging primarily in the business of investing, reinvesting or trading in securities will be outside of the general definition of an investment company provided that it passes the 40% test. This may be the case where an oil and gas subsidiary holds a sufficient amount of oil and gas assets constituting real estate interests together with other assets that are not investment securities such as equipment. Oil and gas subsidiaries that hold oil and gas assets that constitute real property interests, but are unable to pass the 40% test, may rely on Section 3(c)(5)(C), subject to the requirements and restrictions described above. Alternately, an oil and gas subsidiary may rely on Section 3(c)(9) of the Investment Company Act if substantially all of its business consists of owning or holding oil, gas or other mineral royalties or leases, certain fractional interests, or certificates of interest or participations in or investment contracts relating to such royalties, leases or fractional interests. These various restrictions imposed on our oil and gas subsidiaries by the Investment Company Act may have the effect of limiting our freedom of action with respect to oil and gas assets (or other assets) that may be held or acquired by such subsidiary or the manner in which we may deal in such assets.

In addition, we anticipate that one or more of our subsidiaries, will qualify for an exception from registration as an investment company under the 1940 Act pursuant to either Section 3(c)(5)(A) of the 1940 Act, which is available for entities primarily engaged in the business of purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services, and/or Section 3(c)(5)(B) of the 1940 Act, which is available for entities primarily engaged in the business of making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and services and, in each case, the entities are not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates.  In order to rely on Sections 3(c)(5)(A) and (B) and be deemed “primarily engaged” in the applicable businesses, at least 55% of an issuer’s assets must represent investments in eligible loans and receivables under those sections. We intend to treat as qualifying assets for purposes of these exceptions the purchases of loans and leases representing part or all of the sales price of equipment and loans where the loan proceeds are specifically provided to finance equipment, services and structural improvements to properties and other facilities and maritime and infrastructure projects or improvements.  We intend to rely on guidance published by the SEC or its staff in determining which assets are deemed qualifying assets.

As noted above, if the combined values of the securities issued to us by any non-majority-owned subsidiaries and our subsidiaries that must rely on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, exceed 40% of the value of our total assets (exclusive of United States government securities and cash items) on an unconsolidated basis, we may be deemed to be an investment company. If we fail to maintain an exception, exemption or other exclusion from the Investment Company Act, we could, among other things, be required either (i) to change substantially the manner in which we conduct our operations to avoid being subject to the Investment Company Act or (ii) to register as an investment company. Either of these would likely have a material adverse effect on us, the type of investments we make, our ability to service our indebtedness and to make distributions on our shares, and on the market price of our shares and any other securities we may issue. If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with certain affiliated persons (within the meaning of the Investment Company Act), portfolio composition (including restrictions with respect to diversification and industry concentration) and other matters. Additionally, our Manager would have the right to terminate our Management Agreement effective the date immediately prior to our becoming an investment company. Moreover, if we were required to register as an investment company, we would no longer be eligible to be treated as a partnership for United States federal income tax purposes. Instead, we would be classified as a corporation for tax purposes and would be able to avoid corporate taxation only to the extent that we were able to elect and qualify as a regulated investment company (“RIC”) under applicable tax rules. Because our eligibility for RIC status would depend on our assets and sources of income at the time that we were required to register as an investment company, there can be no assurance that we would be able to qualify as a RIC. If we were to lose partnership status and fail to qualify as a RIC, we would be taxed as a regular corporation. See “Partnership Tax Matters—Qualifying Income Exception”.

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We have not requested approval or guidance from the SEC or its staff with respect to our Investment Company Act determinations, including, in particular: our treatment of any subsidiary as majority-owned; the compliance of any subsidiary with Section 3(c)(5)(A), (B), (C) or Section 3(c)(9) of, or Rule 3a-7 under, the Investment Company Act, including any subsidiary’s determinations with respect to the consistency of its assets or operations with the requirements thereof; or whether our interests in one or more subsidiaries constitute investment securities for purposes of the 40% test. If the SEC were to disagree with our treatment of one or more subsidiaries as being excepted from the Investment Company Act pursuant to Rule 3a-7, Section 3(c)(5)(A), (B), (C), Section 3(c)(9) or any other exception, with our determination that one or more of our other holdings do not constitute investment securities for purposes of the 40% test, or with our determinations as to the nature of the business in which we engage or the manner in which we hold ourselves out, we and/or one or more of our subsidiaries would need to adjust our operating strategies or assets in order for us to continue to pass the 40% test or register as an investment company, either of which could have a material adverse effect on us. Moreover, we may be required to adjust our operating strategy and holdings, or to effect sales of our assets in a manner that, or at a time or price at which, we would not otherwise choose, if there are changes in the laws or rules governing our Investment Company Act status or that of our subsidiaries, or if the SEC or its staff provides more specific or different guidance regarding the application of relevant provisions of, and rules under, the Investment Company Act. The SEC published on August 31, 2011 an advance notice of proposed rulemaking to potentially amend the conditions for reliance on Rule 3a-7 and the treatment of asset-backed issuers that rely on Rule 3a-7 under the Investment Company Act (the “3a-7 Release”). The SEC, in the 3a-7 Release, requested public comment on the nature and operation of issuers that rely on Rule 3a-7 and indicated various steps it may consider taking in connection with Rule 3a-7, although it did not formally propose any changes to the rule. Among the issues for which the SEC has requested comment in the 3a-7 Release is whether Rule 3a-7 should be modified so that parent companies of subsidiaries that rely on Rule 3a-7 should treat their interests in such subsidiaries as investment securities for purposes of the 40% test. The SEC also published on August 31, 2011 a concept release seeking information about the nature of entities that invest in mortgages and mortgage-related pools and public comment on how the SEC staff’s interpretive positions in connection with Section 3(c)(5)(C) affect these entities, although it did not propose any new interpretive positions or changes to existing interpretive positions in connection with Section 3(c)(5)(C). Any guidance or action from the SEC or its staff, including changes that the SEC may ultimately propose and adopt to the way Rule 3a-7 applies to entities or new or modified interpretive positions related to Section 3(c)(5)(C), could further inhibit our ability, or the ability of a subsidiary, to pursue our current or future operating strategies, which could have a material adverse effect on us.

If the SEC or a court of competent jurisdiction were to find that we were required, but failed, to register as an investment company in violation of the Investment Company Act, we may have to cease business activities, we would breach representations and warranties and/or be in default as to certain of our contracts and obligations, civil or criminal actions could be brought against us, our contracts would be unenforceable unless a court were to require enforcement and a court could appoint a receiver to take control of us and liquidate our business, any or all of which would have a material adverse effect on our business.

OTHER REGULATORY ITEMS

In August 2012, the U.S. Commodities Futures Trading Commission (“CFTC”) adopted a series of rules to establish a new regulatory framework for swaps that may cause certain users of swaps to be deemed commodity pools or to register as commodity pool operators. In October 2012, the CFTC delayed the implementation of the relevant rules until December 31, 2012. Although we believe that KKR Financial Holdings LLC is not a commodity pool, we have requested confirmation of this conclusion from the CFTC. To the extent that any of our subsidiaries may be deemed to be a commodity pool, we believe they should satisfy certain exemptions to these rules available to privately offered entities. However, if the CFTC were to take the position that KKR Financial Holdings LLC is a commodity pool, our directors may be required to register as commodity pool operators. Such registration would add to our operating and compliance costs and could affect the manner in which we use swaps as part of our operating and hedging strategies.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risks

From time to time, we may make investments that are denominated in a foreign currency through which we may be subject to foreign currency exchange risk. As of September 30, 2013, $276.9 million par amount, or 3.9%, of our corporate debt portfolio was denominated in foreign currencies, of which 71.6% was denominated in Euros. In addition, as of September 30, 2013, $122.7 million aggregate cost, or 25.2%, of other assets, which includes our equity investments at estimated fair value and interests in joint ventures and partnerships, was denominated in foreign currencies, of which 19.8% was denominated in Euros and 23.6% was denominated in Canadian dollars.

Based on these investments, we are exposed to movements in foreign currency exchange rates which may impact earnings if the United States dollar significantly strengthens or weakens against foreign currencies. Accordingly, we may use derivative instruments from time to time, including foreign exchange options and forward contracts, to manage the impact of fluctuations in foreign currency exchange rates. As of September 30, 2013, the net contractual notional balance of our foreign exchange options and forward contracts totaled $163.3 million, all of which related to certain of our foreign currency denominated corporate debt holdings. Refer to “Derivative Risk” below for further discussion on our derivatives.

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Credit Spread Exposure

Our investments are subject to spread risk. Our investments in floating rate loans and securities are valued based on a market credit spread over LIBOR and for which the value is affected by changes in the market credit spreads over LIBOR. Our investments in fixed rate loans and securities are valued based on a market credit spread over the rate payable on fixed rate United States Treasuries of like maturity. Increased credit spreads, or credit spread widening, will have an adverse impact on the value of our investments while decreased credit spreads, or credit spread tightening, will have a positive impact on the value of our investments. However, tightening credit spreads will increase the likelihood that certain holdings will be refinanced at lower rates that would negatively impact our earnings.

Interest Rate Risk

Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in repricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows and the prepayment rates experienced on our investments that have embedded borrower optionality. The objective of interest rate risk management is to achieve earnings, preserve capital and achieve liquidity by minimizing the negative impacts of changing interest rates, asset and liability mix, and prepayment activity.

We are exposed to basis risk between our investments and our borrowings. Interest rates on our floating rate investments and our variable rate borrowings do not reset on the same day or with the same frequency and, as a result, we are exposed to basis risk with respect to index reset frequency. Our floating rate investments may reprice on indices that are different than the indices that are used to price our variable rate borrowings and, as a result, we are exposed to basis risk with respect to repricing index. The basis risks noted above, in addition to other forms of basis risk that exist between our investments and borrowings, could have a material adverse impact on our future net interest margins.

Interest rate risk impacts our interest income, interest expense, prepayments, as well as the fair value of our investments, interest rate derivatives and liabilities. We generally fund our variable rate investments with variable rate borrowings with similar interest rate reset frequencies. Based on our variable rate investments and related variable rate borrowings as of September 30, 2013, we estimated that increases in interest rates would impact net income by approximately (amounts in thousands):

Change in interest rates	Annual Impact
Increase of 1.0%	$	(14,929	)
Increase of 2.0%	$	5,370
Increase of 3.0%	$	25,670
Increase of 4.0%	$	45,970
Increase of 5.0%	$	66,269

As of September 30, 2013, approximately 58.7% of our floating rate corporate debt portfolio had LIBOR floors with a weighted average floor of 1.2%. Given these LIBOR floors, increases in short-term interest rates above a certain point beginning between 1% and 2% will result in a greater positive impact as yields on interest-earning assets are expected to rise faster than the cost of funding sources. The simulation above assumes that the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates.

We manage our interest rate risk using various techniques ranging from the purchase of floating rate investments to the use of interest rate derivatives. The use of interest rate derivatives is a component of our interest risk management strategy. The contractual notional balance of our interest rate swaps was $485.8 million as of September 30, 2013. Of the $485.8 million, $360.8 million was related to two pay-fixed, receive-variable interest rate swaps through certain of our CLOs. These interest rate derivatives consisted of swaps to hedge a portion of the interest rate risk associated with our borrowings under the CLO senior secured notes. The remaining $125.0 million of interest rate swaps were used to hedge a portion of the interest rate risk associated with our floating rate junior subordinated notes. The objective of the interest rate swaps is to eliminate the variability of cash flows in the interest payments of these notes due to fluctuations in the indexed rate. Refer to “Derivative Risk” below for further discussion on our derivatives.

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Derivative Risk

Derivative transactions including engaging in swaps and foreign currency transactions are subject to certain risks. There is no guarantee that a company can eliminate its exposure under an outstanding swap agreement by entering into an offsetting swap agreement with the same or another party. Also, there is a possibility of default of the other party to the transaction or illiquidity of the derivative instrument. Furthermore, the ability to successfully use derivative transactions depends on the ability to predict market movements which cannot be guaranteed. As such, participation in derivative instruments may result in greater losses as we would have to sell or purchase an investment at inopportune times for prices other than current market prices or may force us to hold an asset we might otherwise have sold. In addition, as certain derivative instruments are unregulated, they are difficult to value and are therefore susceptible to liquidity and credit risks.

Collateral posting requirements are individually negotiated between counterparties and there is currently no regulatory requirement concerning the amount of collateral that a counterparty must post to secure its obligations under certain derivative instruments. Currently, there is no requirement that parties to a contract be informed in advance when a credit default swap is sold. As a result, investors may have difficulty identifying the party responsible for payment of their claims. If a counterparty’s credit becomes significantly impaired, multiple requests for collateral posting in a short period of time could increase the risk that we may not receive adequate collateral. Amounts paid by us as premiums and cash or other assets held in margin accounts with respect to derivative instruments are not available for investment purposes.

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments held as of September 30, 2013 (amounts in thousands):

	As ofSeptember 30, 2013
	Notional			Estimated Fair Value
Cash Flow Hedges:
Interest rate swaps	$	485,833		$	(52,332	)
Free-Standing Derivatives:
Commodity swaps	—			4,330
Credit default swaps—protection purchased	(109,953		)	(1,665		)
Foreign exchange forward contracts	(293,457		)	(23,174		)
Foreign exchange options	130,207			7,931
Common stock warrants	—			4,541
Total rate of return swaps	—			729
Options	—			8,880
Total				$	(50,760	)

For our derivatives, our credit exposure is directly with our counterparties and continues until the maturity or termination of such contracts. The following table sets forth the estimated net fair values of our primary derivative investments by remaining contractual maturity as of September 30, 2013 (amounts in thousands):

	Less than 1 year			1 - 3 years			3 - 5 years			More than 5 years			Total
Cash Flow Hedges:
Interest rate swaps	$	(2,847	)	$	—		$	(11,911	)	$	(37,574	)	$	(52,332	)
Free-Standing Derivatives:
Commodity swaps	625			3,616			89			—			4,330
Credit default swaps—protection purchased	(44		)	—			(1,621		)	—			(1,665		)
Foreign exchange forward contracts	(18,445		)	(3,581		)	(1,148		)	—			(23,174		)
Foreign exchange options	7,931			—			—			—			7,931
Total rate of return swaps	—			—			—			729			729
Total	$	(12,780	)	$	35		$	(14,591	)	$	(36,845	)	$	(64,181	)

Commodity Price Risk

Certain of our natural resources holdings, including our working interests in producing oil and natural gas fields are subject to fluctuations in the prices of oil, natural gas and NGL, which may cause our revenues and cash flows to be volatile. As of September 30, 2013, natural gas comprised approximately 48% of our total working interest reserves, while NGL and oil comprised approximately 20% and 32%, respectively. In order to help mitigate the potential exposure and effects of changing commodity prices on our revenues and cash flows from operations, we have entered into, and expect to continue to use, commodity swaps for our working interests. Our policy has been to hedge a substantial portion of the total estimated oil, natural gas and NGL production on our working interests for a specified amount of time. We currently use receive-fixed, pay-floating commodity derivative contracts, specifically oil, natural gas and certain NGL product swaps, for certain years through 2016. Our unhedged production may expose us to commodity price declines or alternatively, provide the potential upside from commodity price increases. Our price hedging strategy and future hedging transactions, including the prices at which we hedge our production, are dependent upon several factors, including expected production and commodities prices at the time we enter into these transactions.

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We do not designate any of our commodity derivatives as cash flow hedges for accounting purposes. As such, the changes in fair value of these instruments are recorded in current period earnings. For the three and nine months ended September 30, 2013, we had less than $0.1 million and $1.0 million of commodity derivatives settlements, respectively, which are settled monthly. The estimated fair value of our commodity swaps as of September 30, 2013 totaled $4.3 million. As a significant portion of our commodity derivatives hedge the majority of our estimated natural gas proved developed producing (“PDP”) production through 2015, a 40% decrease in the future prices of natural gas as compared to the future prices at September 30, 2013 would result in an estimated unhedged PDP production value decrease of approximately $3.1 million or less for any year through 2015. In addition, as we hedge a substantial portion of our estimated total proved oil production through 2014, a 40% decrease in the future price of oil as compared to the future price at September 30, 2013 would result in an estimated unhedged total proved production value decrease of approximately $33.5 million or less for any year through 2014. While this decline represents an approximate potential loss, we ultimately have the option to continue participation or defer participation in drilling on certain properties based on the economics of each transaction.

Counterparty Risk

We have credit risks that are generally related to the counterparties with which we do business. If a counterparty becomes bankrupt, or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding. These risks of non-performance may differ from risks associated with exchange-traded transactions which are typically backed by guarantees and have daily mark-to-market and settlement positions. Transactions entered into directly between parties do not benefit from such protections and thus, are subject to counterparty default. It may be the case where any cash or collateral we pledged to the counterparty may be unrecoverable and we may be forced to unwind our derivative agreements at a loss. We may obtain only a limited recovery or may obtain no recovery in such circumstances, thereby reducing liquidity and earnings.

Management Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Significant estimates, assumptions and judgments are applied in situations including the determination of our allowance for loan losses and the valuation of certain investments. We revise our estimates when appropriate. However, actual results could materially differ from management’s estimates.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See discussion of quantitative and qualitative disclosures about market risk in “Quantitative and Qualitative Disclosures About Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 4.  CONTROLS AND PROCEDURES

The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2013. Based on their evaluation, the Company’s principal executive and principal financial officer concluded that the Company’s disclosure controls and procedures as of September 30, 2013 were designed and were functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ending September 30, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PRECEEDINGS

None.

ITEM 1A. RISK FACTORS

For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on February 28, 2013, which is accessible on the Securities and Exchange Commission’s website at www.sec.gov.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 15, 2013, our non-employee directors deferred less than $0.1 million of cash compensation in exchange for 4,084 phantom shares pursuant to the KKR Financial Holdings LLC Non-Employee Directors’ Deferred Compensation and Share Award Plan. In addition, on August 20, 2013, our non-employee directors deferred $0.1 million of cash distribution in exchange for 11,224 phantom shares, respectively, pursuant to the KKR Financial Holdings LLC Non-Employee Directors’ Deferred Compensation and Share Award Plan. Each phantom share is the economic equivalent of one of our common shares. The phantom shares become payable, in cash or common shares, at our election, upon the earlier of (i) the first day of January following the applicable non-employee director’s termination of service as a director or (ii) an election date pre-selected by the applicable non-employee director, and in any event in cash or common shares, at the election of the applicable non-employee director, upon the occurrence of a change in control of us. The grants made to our non-employee directors were exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof.

On August 9, 2013, the Compensation Committee of our board of directors granted to our non-employee directors 39,288 restricted common shares pursuant to our 2007 Share Incentive Plan. Each of these grants vests in one-third increments on the first three anniversaries of the date of grant. In addition, on August 9, 2013, our non-employee directors deferred $0.4 million of restricted common shares for 33,675 phantom shares pursuant to the KKR Financial Holdings LLC Non-Employee Directors’ Deferred Compensation and Share Award Plan. The grants made to our non-employee directors were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. For further discussion of the 2007 Share Incentive Plan, see “Item 1. Financial Statements—Note 11. Shareholders’ Equity” of this Quarterly Report on Form 10-Q.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number	Description
31.1	Chief Executive Officer Certification
31.2	Chief Financial Officer Certification
32	Certification Pursuant to 18 U.S.C. Section 1350
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, KKR Financial Holdings LLC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	KKR Financial Holdings LLC
Signature	Title
/s/ CRAIG J. FARR	Chief Executive Officer (Principal Executive Officer)
Craig J. Farr
/s/ MICHAEL R. MCFERRAN	Chief Financial Officer (Principal Financial and Accounting Officer)
Michael R. McFerran
Date: November 6, 2013

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EX-31.1

Exhibit 31.1

Certification

I, Craig J. Farr, certify that:

1.I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2013 of KKR Financial Holdings LLC;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 6, 2013
	/s/ CRAIG J. FARR
	Craig J. Farr
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification

I, Michael R. McFerran, certify that:

1.I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2013 of KKR Financial Holdings LLC;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 6, 2013
	/s/ MICHAEL R. MCFERRAN
	Michael R. McFerran
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

In connection with the Quarterly Report of KKR Financial Holdings LLC (the “Company”) on Form 10-Q for the period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Craig J. Farr, Chief Executive Officer of the Company, and Michael R. McFerran, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

November 6, 2013
	/s/ CRAIG J. FARR
	Craig J. Farr
	Chief Executive Officer
	(Principal Executive Officer)
	/s/ MICHAEL R. MCFERRAN
	Michael R. McFerran
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Total gain or losses (for the period)
Transfers from Level 1 into Level 2	$ 0	$ 0	$ 0	$ 0
Transfers from Level 2 into Level 1	0	0	0	0
Securities Available-For-Sale: Corporate Debt Securities
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	37,380	68,101	42,221	67,233
Total gain or losses (for the period)
Included in earnings	297	573	279	1,026
Included in other comprehensive income	338	6,058	559	12,026
Sales		(20,000)		(24,660)
Settlements	936	(10,002)	(4,108)	(10,895)
Balance at the end of the period	38,951	44,730	38,951	44,730
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	297	200	279	417
Other Securities, at Estimated Fair Value
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	27,872	3,104	2,909	2,788
Total gain or losses (for the period)
Included in earnings	1,384	252	2,656	578
Purchases	8,100		31,791
Settlements	(1,154)		(1,154)
Balance at the end of the period	36,202	3,356	36,202	3,356
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	1,384	252	2,656	578
Residential Mortgage-Backed Securities
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	82,973	87,935	83,842	86,479
Total gain or losses (for the period)
Included in earnings	1,747	2,764	7,301	7,498
Settlements	(5,334)	(3,829)	(11,757)	(7,107)
Balance at the end of the period	79,386	86,870	79,386	86,870
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	5,868	9,073	21,565	24,228
Corporate Loans, at Estimated Fair Value
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	45,936	12,831	16,141
Total gain or losses (for the period)
Included in earnings	497	264	(555)	1,017
Purchases	37,959	1,650	69,727	13,494
Settlements	89	196	(832)	430
Balance at the end of the period	84,841	14,941	84,841	14,941
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	497	264	(851)	1,017
Equity investments, at estimated fair value
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	100,294	122,736	97,746	150,962
Total gain or losses (for the period)
Included in earnings	5,558	8,996	8,648	13,214
Transfers out of Level 3				(34,230)
Purchases	5,000	1,913	5,003	8,064
Sales	(198)		(198)	(4,365)
Settlements			(545)
Balance at the end of the period	110,654	133,645	110,654	133,645
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	5,857	8,996	8,947	10,211
Options
Total gain or losses (for the period)
Included in earnings	90		90
Purchases	8,790		8,790
Balance at the end of the period	8,880		8,880
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	90		90
Total Rate of Return Swaps
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period				152
Total gain or losses (for the period)
Included in earnings				141
Settlements				(293)
Common Stock Warrants
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	3,561	1,864	1,574	1,266
Total gain or losses (for the period)
Included in earnings	(1,475)	503	512	1,101
Balance at the end of the period	2,086	2,367	2,086	2,367
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	(1,475)	503	513	1,101
Foreign Exchange Options, Net
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	5,751	8,254	8,277	13,394
Total gain or losses (for the period)
Included in earnings	2,180	(920)	(346)	(6,060)
Balance at the end of the period	7,931	7,334	7,931	7,334
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	2,180	(920)	(346)	(6,060)
Interests in Joint Ventures and Partnerships
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	235,024	98,101	142,477
Total gain or losses (for the period)
Included in earnings	3,739	3,233	7,646	751
Transfers into Level 3				34,230
Purchases	132,198	11,967	229,862	78,508
Settlements	(38,040)	(281)	(47,064)	(469)
Balance at the end of the period	332,921	113,020	332,921	113,020
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	3,739	3,233	7,646	751
Other Assets
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period				567
Total gain or losses (for the period)
Included in earnings				342
Sales				(706)
Settlements				$ (203)

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 6) (Unobservable Inputs, Foreign exchange options, Option pricing model, USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Valuation techniques used for liabilities, measured at fair value and categorized within level 3
Liabilities, fair value	$ 489	$ 285
Weighted Average
Valuation techniques used for liabilities, measured at fair value and categorized within level 3
Forward and spot rates, Liabilities	0.02	0.02

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COMMITMENTS & CONTINGENCIES

9 Months Ended

Sep. 30, 2013

COMMITMENTS & CONTINGENCIES

COMMITMENTS & CONTINGENCIES

NOTE 10. COMMITMENTS & CONTINGENCIES

Commitments

As part of its strategy of investing in corporate loans, the Company commits to purchase interests in primary market loan syndications, which obligate the Company, subject to certain conditions, to acquire a predetermined interest in such loans at a specified price on a to-be-determined settlement date. Consistent with standard industry practices, once the Company has been informed of the amount of its syndication allocation in a particular loan by the syndication agent, the Company bears the risks and benefits of changes in the fair value of the syndicated loan from that date forward. In addition, the Company also commits to purchase corporate loans in the secondary market that similar to the above, the Company bears the risks and benefits of changes in the fair value from the trade date forward. As of September 30, 2013 and December 31, 2012, the Company had committed to purchase corporate loans with aggregate par amounts totaling $209.7 million and $254.2 million, respectively. In addition, the Company participates in certain contingent financing arrangements, whereby the Company is committed to provide funding of up to a specific predetermined amount at the discretion of the borrower or has entered into an agreement to acquire interests in certain assets. As of September 30, 2013 and December 31, 2012, the Company had unfunded financing commitments for corporate loans totaling $5.0 million and $9.8 million, respectively. The Company did not have any significant losses as of September 30, 2013, nor does it expect any significant losses related to those assets for which it committed to purchase and fund.

The Company participates in joint ventures and partnerships alongside KKR and its affiliates through which the Company contributes capital for assets, including development projects related to the Company’s interests in joint ventures and partnerships that hold commercial real estate and natural resources investments, as well as specialty lending focused businesses. The Company estimated these future contributions to range from approximately $290 million to $300 million as of September 30, 2013 and $203.0 million as of December 31, 2012.

Guarantees

As of September 30, 2013, the Company had investments, held alongside KKR and its affiliates, in real estate entities that were financed with non-recourse debt totaling $231.7 million. Under non-recourse debt, the lender generally does not have recourse against any other assets owned by the borrower or any related parties of the borrower, except for certain specified exceptions listed in the respective loan documents including customary “bad boy” acts. In connection with these investments, joint and several non-recourse “bad boy” guarantees were provided for losses relating solely to specified bad faith acts that damage the value of the real estate being used as collateral. The Company does not expect any related losses. As of both September 30, 2013 and December 31, 2012, the Company also had financial guarantees related to its natural resources investments totaling $17.9 million for which the Company does not expect any significant losses.

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NATURAL RESOURCES ASSETS (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Oil and natural gas properties
Proved oil and natural gas properties (successful efforts method)	$ 394,370		$ 394,370		$ 315,446
Unproved oil and natural gas properties	35,445		35,445		2,596
Less: Accumulated depreciation, depletion and amortization	(57,781)		(57,781)		(28,113)
Oil and gas properties, net	372,034		372,034		289,929
Impairment charges	$ 0	$ 300	$ 0	$ 3,300

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Condensed Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenues
Loan interest income	$ 82,541	$ 101,988	$ 272,919	$ 313,684
Securities interest income	10,933	18,791	39,326	62,180
Oil and gas revenue	32,446	21,487	84,118	44,262
Other	2,782	1,068	10,033	1,692
Total revenues	128,702	143,334	406,396	421,818
Investment costs and expenses
Provision for loan losses	9,339		20,407	46,498
Oil and gas production costs	9,163	9,803	26,420	19,041
Oil and gas depreciation, depletion and amortization	11,806	7,011	29,910	14,867
Other	963	714	2,531	3,482
Total investment costs and expenses	77,877	70,900	224,119	245,807
Other income
Net realized and unrealized gain on investments	5,673	75,774	125,397	160,788
Net realized and unrealized loss on derivatives and foreign exchange	(3,062)	(8,102)	(5,012)	(2,583)
Net loss on restructuring and extinguishment of debt			(20,269)	(445)
Other income	3,615	5,371	17,565	10,664
Total other income	6,226	73,043	117,681	168,424
Other expenses
Related party management compensation	10,920	26,602	56,744	57,519
General, administrative and directors expenses	4,654	5,464	13,138	14,913
Professional services	1,573	1,130	5,288	4,334
Total other expenses	17,147	33,196	75,170	76,766
Income before income taxes	39,904	112,281	224,788	267,669
Income tax expense (benefit)	18	317	434	(3,548)
Net income	39,886	111,964	224,354	271,217
Preferred share distributions	6,891		20,520
Net income available to common shareholders	32,995	111,964	203,834	271,217
Net income per common share:
Basic (in dollars per share)	$ 0.16	$ 0.63	$ 1.01	$ 1.52
Diluted (in dollars per share)	$ 0.16	$ 0.61	$ 1.01	$ 1.48
Weighted-average number of common shares outstanding:
Basic (in shares)	204,134	177,862	201,824	177,815
Diluted (in shares)	204,134	183,431	201,824	182,440
Distributions declared per common share (in dollars per share)	$ 0.21	$ 0.21	$ 0.68	$ 0.65
Affiliates
Investment costs and expenses
Interest expense	6,839	12,954	26,485	38,131
Nonaffiliates
Investment costs and expenses
Interest expense	$ 39,767	$ 40,418	$ 118,366	$ 123,788

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EARNINGS PER COMMON SHARE

9 Months Ended

Sep. 30, 2013

EARNINGS PER COMMON SHARE

EARNINGS PER COMMON SHARE

NOTE 3. EARNINGS PER COMMON SHARE

The following table presents a reconciliation of basic and diluted net income per common share for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands, except per share information), as well as the distributions declared per common share during the three and nine months ended September 30, 2013 and 2012:

	Three months ended September 30				Nine months ended September 30
	2013		2012		2013		2012
Net income	$	39,886	$	111,964	$	224,354	$	271,217
Less: Preferred share distributions	6,891		—		20,520		—
Net income available to common shareholders	$	32,995	$	111,964	$	203,834	$	271,217
Less: Dividends and undistributed earnings allocated to participating securities	109		355		701		889
Net income allocated to common shareholders	$	32,886	$	111,609	$	203,133	$	270,328
Basic:
Basic weighted average common shares outstanding	204,134		177,862		201,824		177,815
Net income per common share	$	0.16	$	0.63	$	1.01	$	1.52
Diluted:
Basic weighted average common shares outstanding	204,134		177,862		201,824		177,815
Dilutive effect of convertible senior notes(1)	—		5,569		—		4,625
Diluted weighted average common shares outstanding(2)	204,134		183,431		201,824		182,440
Net income per common share	$	0.16	$	0.61	$	1.01	$	1.48

(1) During the first quarter of 2013, $172.5 million of the Company’s outstanding convertible notes had been tendered for conversion and were settled with 26.1 million common shares.

(2) Potential anti-dilutive common shares excluded from diluted earnings per share related to common share options were 1,932,279 for the three and nine months ended September 30, 2013 and 2012.

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EARNINGS PER COMMON SHARE (Tables)

9 Months Ended

Sep. 30, 2013

EARNINGS PER COMMON SHARE

Schedule of reconciliation of basic and diluted net income and distributions declared per common share

The following table presents a reconciliation of basic and diluted net income per common share for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands, except per share information), as well as the distributions declared per common share during the three and nine months ended September 30, 2013 and 2012:

	Three months ended September 30				Nine months ended September 30
	2013		2012		2013		2012
Net income	$	39,886	$	111,964	$	224,354	$	271,217
Less: Preferred share distributions	6,891		—		20,520		—
Net income available to common shareholders	$	32,995	$	111,964	$	203,834	$	271,217
Less: Dividends and undistributed earnings allocated to participating securities	109		355		701		889
Net income allocated to common shareholders	$	32,886	$	111,609	$	203,133	$	270,328
Basic:
Basic weighted average common shares outstanding	204,134		177,862		201,824		177,815
Net income per common share	$	0.16	$	0.63	$	1.01	$	1.52
Diluted:
Basic weighted average common shares outstanding	204,134		177,862		201,824		177,815
Dilutive effect of convertible senior notes(1)	—		5,569		—		4,625
Diluted weighted average common shares outstanding(2)	204,134		183,431		201,824		182,440
Net income per common share	$	0.16	$	0.61	$	1.01	$	1.48

(1) During the first quarter of 2013, $172.5 million of the Company’s outstanding convertible notes had been tendered for conversion and were settled with 26.1 million common shares.

(2) Potential anti-dilutive common shares excluded from diluted earnings per share related to common share options were 1,932,279 for the three and nine months ended September 30, 2013 and 2012.

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SHAREHOLDERS' EQUITY (Details 2) (Common share options, USD $)	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012
Common share options
Number of Options
Outstanding at the beginning of the period (in shares)	1,932,279	1,932,279
Outstanding at the end of the period (in shares)	1,932,279	1,932,279
Exercisable at the end of the period (in shares)	1,932,279		1,932,279
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)	$ 20.00	$ 20.00
Outstanding at the end of the period (in dollars per share)	$ 20.00	$ 20.00

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BORROWINGS (Details 2) (USD $)	9 Months Ended		3 Months Ended	9 Months Ended	3 Months Ended	9 Months Ended	0 Months Ended	3 Months Ended		9 Months Ended		0 Months Ended	3 Months Ended	9 Months Ended		0 Months Ended		9 Months Ended			0 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 CLO 2007-A, CLO 2005-1, CLO 2005-2 and CLO 2006-1 senior notes	Sep. 30, 2013 CLO 2007-A, CLO 2005-1, CLO 2005-2 and CLO 2006-1 senior notes	Sep. 30, 2012 CLO 2007-A, CLO 2005-1 and CLO 2005-2 senior notes	Sep. 30, 2012 CLO 2007-A, CLO 2005-1 and CLO 2005-2 senior notes	Sep. 27, 2013 CLO 2011-1 senior debt	Sep. 30, 2013 CLO 2011-1 senior debt	Sep. 30, 2012 CLO 2011-1 senior debt	Sep. 30, 2013 CLO 2011-1 senior debt	Sep. 30, 2012 CLO 2011-1 senior debt	Sep. 27, 2013 CLO 2011-1 senior debt Maximum	Sep. 30, 2012 CLO 2007-1 Class D secured notes	Sep. 30, 2012 CLO 2007-1 Class D secured notes	Dec. 21, 2012 CLO 2012-1 senior secured notes	Dec. 21, 2012 CLO 2012-1 senior secured notes Nonaffiliates	Dec. 21, 2012 CLO 2012-1 junior secured notes Nonaffiliates	Sep. 30, 2013 CLO 2007-A Class C secured notes	Sep. 30, 2012 CLO 2007-A Class C secured notes	Jun. 25, 2013 CLO 2013-1 senior secured notes	Jun. 25, 2013 CLO 2013-1 senior secured notes Nonaffiliates	Feb. 27, 2013 2018 Natural Resources Facility
Details of Company's borrowings
Collateralized loan obligation secured debt repaid	$ 774,302,000	$ 702,789,000	$ 190,800,000	$ 697,100,000	$ 114,900,000	$ 636,700,000		$ 31,700,000	$ 10,900,000	$ 77,200,000	$ 66,100,000
Increase in the maximum borrowing capacity							300,000,000
Increase in current borrowing capacity												225,000,000
Par amount of notes issued															412,400,000	367,500,000	21,500,000		11,300,000	519,400,000	458,500,000
Par amount of notes issued													59,500,000	119,000,000
Floating rate senior secured note																342,500,000					442,000,000
Debt, variable interest rate basis							three-month LIBOR									three-month LIBOR					three-month LIBOR	LIBOR
Percentage of margin added to reference rate to determine interest rate on debt							1.35%									2.09%					1.67%
Fixed rate senior secured note																25,000,000					16,500,000
Fixed rate (as a percent)																2.39%					3.73%
Proceeds from senior notes													$ 49,400,000	$ 94,500,000				$ 10,600,000

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SHAREHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2013

SHAREHOLDERS' EQUITY

SHAREHOLDERS' EQUITY

NOTE 11. SHAREHOLDERS’ EQUITY

Preferred Shares

On January 17, 2013, the Company issued 14.95 million of Series A LLC Preferred Shares for gross proceeds of $373.8 million, and net proceeds of $362.0 million. The Series A LLC Preferred Shares trade on the New York Stock Exchange (“NYSE”) under the ticker symbol “KFN.PR” and began trading on January 28, 2013. Distributions on the Series A LLC Preferred Shares are cumulative and are payable, when, as, and if declared by the Company’s board of directors, quarterly on January 15, April 15, July 15 and October 15 of each year, beginning April 15, 2013, at a rate per annum equal to 7.375%.

Common Shares

On May 4, 2007, the Company adopted an amended and restated share incentive plan (the “2007 Share Incentive Plan”) that provides for the grant of qualified incentive common share options that meet the requirements of Section 422 of the Code, non-qualified common share options, share appreciation rights, restricted common shares and other share-based awards. The Compensation Committee of the board of directors administers the plan. Share options and other share-based awards may be granted to the Manager, directors, officers and any key employees of the Manager and to any other individual or entity performing services for the Company.

The exercise price for any share option granted under the 2007 Share Incentive Plan may not be less than 100% of the fair market value of the common shares at the time the common share option is granted. Each option to acquire a common share must terminate no more than ten years from the date it is granted. As of September 30, 2013, the 2007 Share Incentive Plan authorizes a total of 8,839,625 shares that may be used to satisfy awards under the 2007 Share Incentive Plan. On February 14, 2013, the Compensation Committee of the board of directors granted the Manager 292,009 restricted common shares subject to graded vesting over three years with the final vesting date of March 1, 2016.

The following table summarizes restricted common share transactions:

	Manager		Directors		Total
Unvested shares as of January 1, 2013	438,937		92,253		531,190
Issued	292,009		39,288		331,297
Vested	(146,312	)	(46,347	)	(192,659	)
Forfeited	—		—		—
Unvested shares as of September 30, 2013	584,634		85,194		669,828

The Company is required to value any unvested restricted common shares granted to the Manager at the current market price. The Company valued the unvested restricted common shares granted to the Manager at $10.33 per share and $10.05 per share at September 30, 2013 and 2012, respectively. There were $3.9 million and $3.5 million of total unrecognized compensation costs related to unvested restricted common shares granted as of September 30, 2013 and 2012, respectively. These costs are expected to be recognized through 2016.

The following table summarizes common share option transactions:

	Number of Options	Weighted Average Exercise Price
Outstanding as of January 1, 2013	1,932,279	$	20.00
Granted	—	—
Exercised	—	—
Forfeited	—	—
Outstanding as of September 30, 2013	1,932,279	$	20.00

As of September 30, 2013 and 2012, 1,932,279 common share options were exercisable. As of September 30, 2013, the common share options were fully vested and expire in August 2014.

For the three and nine months ended September 30, 2013 and 2012, the components of share-based compensation expense are as follows (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Restricted common shares granted to Manager	$	690	$	778	$	2,073	$	1,577
Restricted common shares granted to certain directors	256		234		769		681
Total share-based compensation expense	$	946	$	1,012	$	2,842	$	2,258

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 7) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Corporate Loans and Allowance for Loan Losses
Recorded Investment	$ 5,911,390	$ 6,029,059
Allowances for loan losses	79,771	128,609
Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	5,356,849	5,583,622
Allowances for loan losses	79,800	128,600
Allocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	554,541	445,437
High | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	325,369	824,075
High | Senior Secured Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	27,093	525,562
High | Second Lien Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	286,974	287,892
High | Subordinated | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	11,302	10,621
Moderate | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	1,051,055	892,066
Moderate | Senior Secured Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	986,481	826,107
Moderate | Second Lien Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	27,504	27,585
Moderate | Subordinated | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	37,070	38,374
Low | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	3,980,425	3,867,481
Low | Senior Secured Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	3,900,851	3,716,831
Low | Second Lien Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	41,619	68,917
Low | Subordinated | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	$ 37,955	$ 81,733

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SUBSEQUENT EVENTS (Details) (Subsequent Event, USD $)	Oct. 23, 2013	Sep. 24, 2013 Series A LLC Preferred Shares
Subsequent events
Cash distribution declared (in dollars per share)	$ 0.22	$ 0.460938

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BORROWINGS (Details 3) (USD $) In Millions, unless otherwise specified	0 Months Ended			0 Months Ended			9 Months Ended		0 Months Ended					9 Months Ended	0 Months Ended
	Nov. 30, 2012 2015 Facility	Sep. 30, 2013 2015 Facility	Dec. 31, 2012 2015 Facility	Nov. 30, 2012 2015 Facility LIBOR	Nov. 30, 2012 2015 Facility Alternate base rate	May 15, 2013 2015 Natural Resources Facility	Sep. 30, 2013 2015 Natural Resources Facility	Dec. 31, 2012 2015 Natural Resources Facility	May 15, 2013 2015 Natural Resources Facility Minimum LIBOR	May 15, 2013 2015 Natural Resources Facility Maximum LIBOR	Feb. 27, 2013 2018 Natural Resources Facility	Sep. 30, 2013 2018 Natural Resources Facility	Aug. 01, 2013 2018 Natural Resources Facility	Sep. 30, 2013 2018 Natural Resources Facility LIBOR	Feb. 27, 2013 2018 Natural Resources Facility Minimum LIBOR	Feb. 27, 2013 2018 Natural Resources Facility Maximum LIBOR
Details of Company's borrowings
Credit facility term	3 years					5 years					5 years
Current borrowing capacity under line of credit facility	$ 150.0					$ 100.9
Maximum borrowing capacity	350.0										6.0		20.0
Amount outstanding		$ 0	$ 0				$ 48.5	$ 107.8				$ 0
Debt, variable interest rate basis				LIBOR	alternate base rate	LIBOR	LIBOR				LIBOR			LIBOR
Percentage of margin added to reference rate to determine interest rate on debt				2.25%	1.25%				1.75%	2.75%					1.75%	3.25%

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SECURITIES (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Securities Available-for-Sale
Amortized Cost	$ 348,582	$ 394,821
Gross Unrealized Gains	21,863	27,281
Gross Unrealized Losses	(2,069)	(9,809)
Estimated Fair Value	368,376	412,293
Total Securities
Amortized Cost	555,840	594,197
Gross Unrealized Gains	35,988	40,811
Gross Unrealized Losses	(72,153)	(101,488)
Total securities	519,675	533,520
Other securities, at estimated fair value
Total Securities
Amortized Cost	62,618	27,991
Gross Unrealized Gains	10,929	9,768
Gross Unrealized Losses	(1,634)	(374)
Securities, at estimated fair value	71,913	37,385
Residential mortgage-backed securities, at estimated fair value
Total Securities
Amortized Cost	144,640	171,385
Gross Unrealized Gains	3,196	3,762
Gross Unrealized Losses	(68,450)	(91,305)
Securities, at estimated fair value	$ 79,386	$ 83,842

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NATURAL RESOURCES ASSETS (Tables)

9 Months Ended

Sep. 30, 2013

NATURAL RESOURCES ASSETS

Summary of the company's oil and gas properties

The following table summarizes the Company’s oil and gas properties as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013			As of December 31, 2012
Proved oil and natural gas properties (successful efforts method)	$	394,370		$	315,446
Unproved oil and natural gas properties	35,445			2,596
Less: Accumulated depreciation, depletion and amortization	(57,781		)	(28,113		)
Oil and gas properties, net	$	372,034		$	289,929

Schedule of recognized fair value of the identifiable assets acquired and liabilities assumed in connection with the acquisition

The table below reflects updated 2012 information including an increase of $3.8 million to both proved property and accounts payable and accrued liabilities (amounts in thousands):

	2013		2012
Proved property	$	—	$	164,557
Unproved property	—		2,658
Other assets	—		16,789
Risk management liabilities	—		(1,037		)
Accounts payable and accrued liabilities	—		(9,030		)
Asset retirement obligation	—		(5,491		)
Total	$	—	$	168,446

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Tables)

9 Months Ended

Sep. 30, 2013

CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES

Schedule of corporate loans

The following table summarizes the Company’s corporate loans as of September 30, 2013 (amounts in thousands):

	September 30, 2013
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,006,179		$	362,853		$	189,367		$	6,558,399
Net unamortized discount	(109,420		)	(25,698		)	(38,316		)	(173,434		)
Total amortized cost	5,896,759			337,155			151,051			6,384,965
Lower of cost or fair value adjustment	—			(24,843		)	—			(24,843		)
Allowance for loan losses	(212,594		)	—			—			(212,594		)
Unrealized gains	—			—			5,544			5,544
Net carrying value	$	5,684,165		$	312,312		$	156,595		$	6,153,072

(1) Principal amounts of corporate loans and corporate loans held for sale are net of cumulative charge-offs and other adjustments totaling $21.1 million as of September 30, 2013.

The following table summarizes the Company’s corporate loans as of December 31, 2012 (amounts in thousands):

	December 31, 2012
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,143,599		$	231,231		$	56,931		$	6,431,761
Net unamortized discount	(136,438		)	(88,895		)	(23,277		)	(248,610		)
Total amortized cost	6,007,161			142,336			33,654			6,183,151
Lower of cost or fair value adjustment	—			(14,047		)	—			(14,047		)
Allowance for loan losses	(223,472		)	—			—			(223,472		)
Unrealized gains	—			—			2,225			2,225
Net carrying value	$	5,783,689		$	128,289		$	35,879		$	5,947,857

(1) Principal amounts of corporate loans and corporate loans held for sale are net of cumulative charge-offs and other adjustments totaling $51.6 million as of December 31, 2012.

Schedule of changes in the allowance for loan losses

The following table summarizes the changes in the allowance for loan losses for the Company’s corporate loan portfolio during the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012			For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Allowance for loan losses:
Beginning balance	$	203,255	$	235,807		$	223,472		$	191,407
Provision for loan losses	9,339		—			20,407			46,498
Charge-offs	—		(9,925		)	(31,285		)	(12,023		)
Ending balance	$	212,594	$	225,882		$	212,594		$	225,882

Schedule of ending balances of allowances for loan losses by basis of impairment method

The following table summarizes the ending balances of the allowance and corporate loans portfolio by basis of impairment method as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	September 30, 2013		December 31, 2012(1)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	132,823	$	94,863
Ending balance: collectively evaluated for impairment	79,771		128,609
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	212,594	$	223,472
Corporate loans (recorded investment)(2):
Ending balance: individually evaluated for impairment	$	554,541	$	445,437
Ending balance: collectively evaluated for impairment	5,356,849		5,583,622
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	5,911,390	$	6,029,059

(1) Certain prior period information has been reclassified to conform to the current year presentation to segregate the Company’s corporate loan portfolio between those that are included in the allocated component of the allowance for loan losses (individually evaluated) and those included in the unallocated component of the allowance for loan losses (collectively evaluated).

(2) Recorded investment is defined as amortized cost plus accrued interest.

Schedule of investment and unpaid principal balance in impaired loans, as well as the related allowance for credit losses

The following table summarizes the Company’s recorded investment and unpaid principal balance in impaired loans, as well as the related allowance for credit losses as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	September 30, 2013						December 31, 2012
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Recorded Investment(1)		Unpaid Principal Balance		Related Allowance
With no related allowance recorded	$	—	$	—	$	—	$	6,490	$	19,931	$	—
With an allowance recorded	554,541		594,548		132,823		438,947		464,214		94,863
Total	$	554,541	$	594,548	$	132,823	$	445,437	$	484,145	$	94,863

(1) Recorded investment is defined as amortized cost plus accrued interest.

Schedule of average recorded investment in impaired loans and interest income recognized

The following table summarizes the Company’s average recorded investment in impaired loans and interest income recognized for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013				For the three months endedSeptember 30, 2012				For the nine months endedSeptember 30, 2013				For the nine months endedSeptember 30, 2012
	Average Recorded Investment(1)		InterestIncome Recognized		Average Recorded Investment(1)		InterestIncome Recognized		Average Recorded Investment(1)		InterestIncome Recognized		Average Recorded Investment(1)		InterestIncome Recognized
With no related allowance recorded	$	—	$	—	$	5,605	$	103	$	1,623	$	—	$	2,803	$	103
With an allowance recorded	554,554		4,471		209,375		3,941		517,544		14,740		139,117		5,722
Total	$	554,554	$	4,471	$	214,980	$	4,044	$	519,167	$	14,740	$	141,920	$	5,825

(1) Recorded investment is defined as amortized cost plus accrued interest.

Schedule of recorded investment in non-accrual loans

The following table summarizes the Company’s recorded investment in non-accrual loans as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	September 30, 2013		December 31, 2012
Loans held for investment(1)	$	554,541	$	445,437
Loans held for sale	51,076		90,840
Loans at estimated fair value	13,191		—
Total non-accrual loans	$	618,808	$	536,277

(1) Comprised of impaired loans held for investment as of both September 30, 2013 and December 31, 2012.

Schedule of recorded investment in corporate loans by internally assigned grades

The following table summarizes how the Company determines internally assigned grades related to credit quality based on a combination of concern as to probability of default and the seniority of the loan in the issuer’s capital structure as of September 30, 2013 and December 31, 2012 (amounts in thousands):

Internally Assigned Grade	Capital Hierarchy	Recorded Investment September 30, 2013 (1)		Recorded Investment December 31, 2012 (1)
High	Senior Secured Loan	$	27,093	$	525,562
	Second Lien Loan	286,974		287,892
	Subordinated	11,302		10,621
		$	325,369	$	824,075
Moderate	Senior Secured Loan	$	986,481	$	826,107
	Second Lien Loan	27,504		27,585
	Subordinated	37,070		38,374
		$	1,051,055	$	892,066
Low	Senior Secured Loan	$	3,900,851	$	3,716,831
	Second Lien Loan	41,619		68,917
	Subordinated	37,955		81,733
		$	3,980,425	$	3,867,481
	Total Unallocated	$	5,356,849	$	5,583,622
	Total Allocated	554,541		445,437
	Total Loans Held for Investment	$	5,911,390	$	6,029,059

(1) Recorded investment is defined as amortized cost plus accrued interest.

Schedule of loans by class modified as troubled debt restructurings

	Three months endedSeptember 30, 2013					Nine months endedSeptember 30, 2013
	Number of loans	Pre-modification outstanding recorded investment(1)		Post-modification outstanding recorded investment(1)		Number of loans	Pre-modification outstanding recorded investment(1)		Post-modification outstanding recorded investment(1)(2)
Troubled debt restructurings:
Loans held for investment	—	$	—	$	—	2	$	68,358	$	39,430
Loans held for sale	—	—		—		—	—		—
Loans at estimated fair value	—	—		—		1	1,670		1,229
Total	—	$	—	$	—	3	$	70,028	$	40,659

(1) Recorded investment is defined as amortized cost plus accrued interest.

(2) Excludes equity securities received from the TDRs with an estimated fair value of $2.1 million.

Schedule of amortized cost of corporate loans held for investment and corporate loans held for sale pledged as collateral

The following table summarizes the amortized cost of corporate loans and corporate loans held for sale pledged as collateral as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013		As ofDecember 31, 2012
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	5,997,105	$	5,804,026
Total	$	5,997,105	$	5,804,026

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES
Average Recorded Investment, with no related allowance recorded		$ 5,605	$ 1,623	$ 2,803
Average Recorded Investment, with an allowance recorded	554,554	209,375	517,544	139,117
Average Recorded Investment	554,554	214,980	519,167	141,920
Interest Income Recognized, with no related allowance recorded		103		103
Interest Income Recognized, with an allowance recorded	4,471	3,941	14,740	5,722
Interest Income Recognized	$ 4,471	$ 4,044	$ 14,740	$ 5,825

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SEGMENT REPORTING (Tables)

9 Months Ended

Sep. 30, 2013

SEGMENT REPORTING

Schedule showing data of reportable segments reconciled to amounts reflected in the consolidated financial statements

The following table shows data of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

For the three months ended	Credit				Natural Resources						Other					Reconciling Items(1)						Total Consolidated
September 30	2013		2012		2013			2012			2013		2012			2013			2012			2013		2012
Total revenues	$	96,243	$	121,808	$	32,446		$	21,487		$	13	$	39		$	—		$	—		$	128,702	$	143,334
Total investment costs and expenses	55,253		51,681		22,386			19,120			238		99			—			—			77,877		70,900
Total other income (loss)	6,969		78,258		(3,437		)	(5,215		)	2,694		—			—			—			6,226		73,043
Total other expenses	14,155		11,302		1,269			2,025			116		49			1,607			19,820			17,147		33,196
Income tax expense	9		316		—			—			9		1			—			—			18		317
Net income (loss)	$	33,795	$	136,767	$	5,354		$	(4,873	)	$	2,344	$	(110	)	$	(1,607	)	$	(19,820	)	$	39,886	$	111,964

For the nine months ended	Credit					Natural Resources						Other					Reconciling Items(2)						Total Consolidated
September 30	2013		2012			2013			2012			2013		2012			2013			2012			2013		2012
Total revenues	$	320,769	$	377,517		$	84,118		$	44,262		$	1,509	$	39		$	—		$	—		$	406,396	$	421,818
Total investment costs and expenses	162,097		204,443			61,355			41,179			667		185			—			—			224,119		245,807
Total other income (loss)	132,853		170,505			(918		)	(1,636		)	6,015		—			(20,269		)	(445		)	117,681		168,424
Total other expenses	43,151		35,852			3,698			4,638			484		92			27,837			36,184			75,170		76,766
Income tax expense (benefit)	420		(3,549		)	—			—			14		1			—			—			434		(3,548		)
Net income (loss)	$	247,954	$	311,276		$	18,147		$	(3,191	)	$	6,359	$	(239	)	$	(48,106	)	$	(36,629	)	$	224,354	$	271,217

(1) Consists of certain expenses not allocated to individual segments including incentive fees of zero and $17.8 million for the three months ended September 30, 2013 and 2012, respectively. The remaining reconciling items include insurance expenses, directors’ expenses and share-based compensation expense.

(2) Consists of certain expenses not allocated to individual segments including incentive fees of $22.7 million and $31.5 million for the nine months ended September 30, 2013 and 2012, respectively and losses on restructuring and extinguishment of debt of $20.3 million and $0.4 million for the nine months ended September 30, 2013 and 2012, respectively. The remaining reconciling items include insurance expenses, directors’ expenses and share-based compensation expense.

The following table shows total assets of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	Credit				Natural Resources				Other				Reconciling Items				Total Consolidated
As of	September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
Total assets	$	7,823,309	$	7,904,116	$	483,546	$	399,225	$	163,940	$	53,742	$	1,196	$	1,796	$	8,471,991	$	8,358,879

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SECURITIES (Details 3) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Net realized gains and losses recognized on the sale of securities available for sale
Gross realized gains		$ 42,108,000	$ 2,829,000	$ 77,075,000
Gross realized losses			(6,000)	(12,000)
Net realized gains		42,108,000	2,823,000	77,063,000
Net realized gains (losses) from paydowns and restructurings	0	(300,000)	2,400,000	16,000,000
Redemption premium			1,600,000	400,000
loss on bond redemption		400,000
Impairment charge for investments which were determined to be other than temporarily impaired	$ 5,000,000	$ 7,400,000	$ 17,500,000	$ 8,400,000

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 8) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013 issuer loan	Sep. 30, 2012	Sep. 30, 2013 issuer loan	Sep. 30, 2012	Dec. 31, 2012 loan issuer
Summary of corporate loans
Charge-offs recorded	$ 0	$ 9,900,000	$ 31,300,000	$ 12,000,000
Corporate loans, held for sale (in dollars)	312,312,000		312,312,000		128,289,000
Corporate loans transferred from held for investment to held for sale			316,003,000	86,969,000
Corporate loans transferred from held for sale to held for investment				114,871,000
Net charge for lower of cost or estimated fair value adjustment			11,442,000	(1,294,000)
Number of issuers in default	2		2		1
Number of loans in default	6		6		2
Amortized cost of corporate loans in default	215,700,000		215,700,000		50,400,000
Corporate Loan Held for Investment
Summary of corporate loans
Charge-offs recorded		9,925,000	31,285,000	12,023,000
Corporate loans transferred from held for investment to held for sale	239,200,000	24,000,000	316,000,000	87,000,000
Amortized cost of corporate loans in default	203,700,000		203,700,000
Corporate Loans Held for Sale
Summary of corporate loans
Charge-offs recorded	0		0
Corporate loans, held for sale (in dollars)	312,300,000	137,900,000	312,300,000	137,900,000	128,300,000
Corporate loans transferred from held for sale to held for investment		49,000,000		114,900,000
Net charge for lower of cost or estimated fair value adjustment	2,800,000	(7,400,000)	11,400,000	(1,300,000)
Corporate Loans Held for Sale | Carrying reported amount
Summary of corporate loans
Corporate loans, held for sale (in dollars)	312,312,000		312,312,000		128,289,000
Corporate Loans, at Estimated Fair Value
Summary of corporate loans
Amortized cost of corporate loans in default	12,000,000		12,000,000
Allocated
Summary of corporate loans
Allowances for loan losses	$ 203,700,000		$ 203,700,000

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SHAREHOLDERS' EQUITY (Tables)

9 Months Ended

Sep. 30, 2013

SHAREHOLDERS' EQUITY

Schedule of restricted common share transactions

	Manager		Directors		Total
Unvested shares as of January 1, 2013	438,937		92,253		531,190
Issued	292,009		39,288		331,297
Vested	(146,312	)	(46,347	)	(192,659	)
Forfeited	—		—		—
Unvested shares as of September 30, 2013	584,634		85,194		669,828

Schedule of common share option transactions

	Number of Options	Weighted Average Exercise Price
Outstanding as of January 1, 2013	1,932,279	$	20.00
Granted	—	—
Exercised	—	—
Forfeited	—	—
Outstanding as of September 30, 2013	1,932,279	$	20.00

Schedule of share-based compensation expense

For the three and nine months ended September 30, 2013 and 2012, the components of share-based compensation expense are as follows (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Restricted common shares granted to Manager	$	690	$	778	$	2,073	$	1,577
Restricted common shares granted to certain directors	256		234		769		681
Total share-based compensation expense	$	946	$	1,012	$	2,842	$	2,258

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ACCUMULATED OTHER COMPREHENSIVE LOSS (Details) (USD $)	3 Months Ended	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2013
ACCUMULATED OTHER COMPREHENSIVE LOSS
Impairment charge for investments which were determined to be other-than-temporary	$ 5,000,000	$ 17,500,000
Components of changes in accumulated other comprehensive income (loss)
Beginning balance	(39,643,000)	(70,226,000)
Other comprehensive (loss) income before reclassifications	4,942,000	26,631,000
Amounts reclassified from accumulated other comprehensive loss	5,008,000	13,902,000
Net current-period other comprehensive (loss) income	9,950,000	40,533,000
Ending balance	(29,693,000)	(29,693,000)
Net unrealized gains on available-for-sale securities
Components of changes in accumulated other comprehensive income (loss)
Beginning balance	16,657,000	17,472,000
Other comprehensive (loss) income before reclassifications	(1,871,000)	(11,580,000)
Amounts reclassified from accumulated other comprehensive loss	5,008,000	13,902,000
Net current-period other comprehensive (loss) income	3,137,000	2,322,000
Ending balance	19,794,000	19,794,000
Net unrealized losses on cash flow hedges
Components of changes in accumulated other comprehensive income (loss)
Beginning balance	(56,300,000)	(87,698,000)
Other comprehensive (loss) income before reclassifications	6,813,000	38,211,000
Net current-period other comprehensive (loss) income	6,813,000	38,211,000
Ending balance	$ (49,487,000)	$ (49,487,000)

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MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS (Details 4) (Affiliates, USD $) In Millions, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Investments in affiliates
Investment in affiliates, number of issuers	28	32
Par	$ 2,000.0	$ 2,100.0
Corporate loans
Investments in affiliates
Par	1,900.0	2,000.0
Corporate debt securities
Investments in affiliates
Par	52.8	39.3
Equity investments, at estimated fair value
Investments in affiliates
Par	84.3	73.8
Joint ventures and partnerships
Investments in affiliates
Aggregate cost amount	$ 319.0	$ 137.6
Affiliated investments | Percent to total investment in corporate loans, debt securities and other investments
Investments in affiliates
Investment in affiliates as a percentage of total investment	26.00%	29.00%

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DERIVATIVE INSTRUMENTS (Details 4) (Free-Standing Derivatives:, USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Effect on income from free-standing derivatives
Realized gains (losses)	$ 506	$ (1,597)	$ 608	$ (2,429)
Unrealized gains (losses)	(3,568)	(6,505)	(5,620)	(154)
Total	(3,062)	(8,102)	(5,012)	(2,583)
Commodity swaps
Effect on income from free-standing derivatives
Realized gains (losses)	(78)	931	1,008	3,590
Unrealized gains (losses)	(3,645)	(6,738)	(2,725)	(2,917)
Total	(3,723)	(5,807)	(1,717)	673
Credit Default Swaps
Effect on income from free-standing derivatives
Realized gains (losses)	(365)	(1,167)	(3,526)	(5,764)
Unrealized gains (losses)	(967)	(4,385)	552	2,497
Total	(1,332)	(5,552)	(2,974)	(3,267)
Foreign exchange forward contracts and options
Effect on income from free-standing derivatives
Realized gains (losses)	502	(1,361)	2,770	(396)
Unrealized gains (losses)	1,444	3,884	(4,929)	(971)
Total	1,946	2,523	(2,159)	(1,367)
Common stock warrants
Effect on income from free-standing derivatives
Unrealized gains (losses)	(1,219)	734	540	1,237
Total	(1,219)	734	540	1,237
Total Rate of Return Swaps
Effect on income from free-standing derivatives
Realized gains (losses)	447		447	141
Unrealized gains (losses)	729		729
Total	1,176		1,176	141
Options
Effect on income from free-standing derivatives
Realized gains (losses)			(91)
Unrealized gains (losses)	90		213
Total	$ 90		$ 122

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013 component	Sep. 30, 2012	Sep. 30, 2013 component	Sep. 30, 2012
Summary of corporate loans
Number of components in the loans receivable allowance for loan losses	2		2
Allowance for loan losses:
Beginning balance			$ 223,472
Provision for loan losses	9,339		20,407	46,498
Charge-offs	0	(9,900)	(31,300)	(12,000)
Ending balance	212,594		212,594
Corporate Loans
Allowance for loan losses:
Beginning balance	203,255	235,807	223,472	191,407
Provision for loan losses	9,339		20,407	46,498
Charge-offs		(9,925)	(31,285)	(12,023)
Ending balance	$ 212,594	$ 225,882	$ 212,594	$ 225,882

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MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS (Details) (USD $)	3 Months Ended		9 Months Ended			3 Months Ended		9 Months Ended			3 Months Ended	9 Months Ended		3 Months Ended			9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 item	Sep. 30, 2012	Dec. 31, 2012	Sep. 30, 2013 Restricted common shares	Sep. 30, 2012 Restricted common shares	Sep. 30, 2013 Restricted common shares	Sep. 30, 2012 Restricted common shares	Sep. 30, 2013 CLO Management Fees CLO subordinated notes Maximum	Sep. 30, 2013 CLO Management Fees CLO 2007-1 subordinated notes Maximum	Sep. 30, 2013 CLO Management Fees CLO 2007-1 subordinated notes Maximum	Sep. 30, 2013 Manager item	Sep. 30, 2013 Manager Base Management Fees	Sep. 30, 2012 Manager Base Management Fees	Sep. 30, 2007 Manager Base Management Fees	Sep. 30, 2013 Manager Base Management Fees	Sep. 30, 2012 Manager Base Management Fees	Sep. 30, 2013 Manager Incentive Fees	Sep. 30, 2012 Manager Incentive Fees	Sep. 30, 2013 Manager Incentive Fees	Sep. 30, 2012 Manager Incentive Fees	Sep. 30, 2013 Manager Reimbursable General and Administrative Expenses	Sep. 30, 2012 Manager Reimbursable General and Administrative Expenses	Sep. 30, 2013 Manager Reimbursable General and Administrative Expenses	Sep. 30, 2012 Manager Reimbursable General and Administrative Expenses	Sep. 30, 2013 Manager Manager Share-Based Compensation Restricted common shares	Sep. 30, 2012 Manager Manager Share-Based Compensation Restricted common shares	Sep. 30, 2013 Manager Manager Share-Based Compensation Restricted common shares	Sep. 30, 2012 Manager Manager Share-Based Compensation Restricted common shares	Sep. 30, 2013 Collateral manager CLO Management Fees	Sep. 30, 2012 Collateral manager CLO Management Fees	Sep. 30, 2013 Collateral manager CLO Management Fees	Sep. 30, 2012 Collateral manager CLO Management Fees
Management Agreement and Related Party Transactions
Renewal period													1 year
Votes for termination, minimum (as a percent)													66.70%
Notice period for termination													180 days
Multiplier used to determine termination fee													4
Number of 12 month periods considered for calculation of termination fee													2
Specified period for which average annual incentive fee to be considered													12 months
Related party transaction expense	$ 0	$ 17,800,000	$ 22,700,000	$ 31,500,000										$ 4,314,000	$ 6,911,000		$ 23,500,000	$ 21,075,000	$ 0	$ 17,768,000	$ 22,742,000	$ 31,495,000	$ 2,300,000	$ 1,900,000	$ 5,900,000	$ 5,800,000					$ 5,916,000	$ 1,145,000	$ 8,429,000	$ 3,372,000
Share-based compensation						946,000	1,012,000	2,842,000	2,258,000																		690,000	778,000	2,073,000	1,577,000
Total related party management compensation	10,920,000	26,602,000	56,744,000	57,519,000
Entity's percentage in subordinated notes (as a percent)										100.00%	100.00%	100.00%
Number of CLOs the Company owns less than 100% of subordinated notes			2
Payable to manager	3,847,000		3,847,000		10,998,000														0		0
Common shares offering																230,400,000
Common share right offering																270,000,000
Common share closing price, minimum (in dollars per share)														$ 20.00			$ 20.00
Number of consecutive trading days																	5 days
Fees, waived														$ 2,200,000	$ 2,200,000		$ 6,600,000	$ 6,600,000													$ 3,000,000	$ 8,000,000	$ 18,000,000	$ 24,400,000

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SECURITIES (Tables)

9 Months Ended

Sep. 30, 2013

SECURITIES

Summary of the company's securities which are carried at estimated fair value

The following table summarizes the Company’s securities as of September 30, 2013, which are carried at estimated fair value (amounts in thousands):

	September 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale	$	348,582	$	21,863	$	(2,069	)	$	368,376
Other securities, at estimated fair value(1)	62,618		10,929		(1,634		)	71,913
Residential mortgage-backed securities, at estimated fair value(1)	144,640		3,196		(68,450		)	79,386
Total securities	$	555,840	$	35,988	$	(72,153	)	$	519,675

(1) Unrealized gains and losses are recorded in earnings.

The following table summarizes the Company’s securities as of December 31, 2012, which are carried at estimated fair value (amounts in thousands):

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale	$	394,821	$	27,281	$	(9,809	)	$	412,293
Other securities, at estimated fair value(1)	27,991		9,768		(374		)	37,385
Residential mortgage-backed securities, at estimated fair value(1)	171,385		3,762		(91,305		)	83,842
Total securities	$	594,197	$	40,811	$	(101,488	)	$	533,520

(1) Unrealized gains and losses are recorded in earnings.

Schedule of gross unrealized losses and fair value of securities classified as available-for-sale aggregated by length of time the securities have been in a continuous unrealized loss position

The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale securities, aggregated by length of time that the individual securities have been in a continuous unrealized loss position as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	Less Than 12 months					12 Months or More					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
September 30, 2013
Securities available-for-sale	$	3,913	$	(125	)	$	28,655	$	(1,944	)	$	32,568	$	(2,069	)
December 31, 2012
Securities available-for-sale	$	45,900	$	(4,398	)	$	37,500	$	(5,411	)	$	83,400	$	(9,809	)

Schedule of net realized gains on the sales of available-for-sale securities

The following table shows the net realized gains on the sales of securities available-for-sale (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Gross realized gains	$	—	$	42,108	$	2,829		$	77,075
Gross realized losses	—		—		(6		)	(12		)
Net realized gains(1)	$	—	$	42,108	$	2,823		$	77,063

(1) Excludes net realized gains from paydowns and restructurings totaling zero and $2.4 million, including a $1.6 million premium on bond redemption, for the three and nine months ended September 30, 2013, respectively. Excludes net realized losses and gains from paydowns and restructurings totaling $(0.3) million, including a $0.4 million loss on bond redemption, and $16.0 million, including a $0.4 million premium on bond redemption, for the three and nine months ended September 30, 2012, respectively. Also, excludes an impairment charge of $5.0 million and $17.5 million for investments which were determined to be other-than-temporarily impaired for the three and nine months ended September 30, 2013, respectively. Comparatively, excludes an impairment charge of $7.4 million and $8.4 million for investments which were determined to be other-than-temporarily impaired for the three and nine months ended September 30, 2012, respectively.

Schedule of estimated fair value of securities pledged as collateral

The following table summarizes the estimated fair value of securities available-for-sale pledged as collateral as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013		As of December 31, 2012
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	327,210	$	354,088
Total	$	327,210	$	354,088

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Condensed Consolidated Statements of Changes in Shareholders' Equity (USD $) In Thousands, unless otherwise specified	Total USD ($)	Preferred Shares	Preferred Shares Paid-In Capital USD ($)	Common Shares	Common Shares Paid-In Capital USD ($)	Accumulated Other Comprehensive Loss USD ($)	Accumulated Deficit USD ($)
Balance at Dec. 31, 2012	$ 1,839,122				$ 2,762,584	$ (70,226)	$ (853,236)
Balance (in shares) at Dec. 31, 2012				178,437
Increase (Decrease) in Shareholders' Equity
Net income	224,354						224,354
Other comprehensive income	40,533					40,533
Distributions declared on preferred shares	(20,520)						(20,520)
Distributions declared on common shares	(139,253)						(139,253)
Grant of restricted common shares (in shares)				331
Issuance of common shares	321				321
Repurchase and cancellation of common shares	(223)				(223)
Repurchase and cancellation of common shares (in shares)				(25)
Issuance of common shares in exchange for convertible notes	186,254				186,254
Issuance of common shares in exchange for convertible notes (in shares)				26,051
Issuance of preferred shares	361,622		361,622
Issuance of preferred shares (in shares)		14,950		30
Share-based compensation expense related to restricted common shares	2,842				2,842
Balance at Sep. 30, 2013	$ 2,495,052		$ 361,622		$ 2,951,778	$ (29,693)	$ (788,655)
Balance (in shares) at Sep. 30, 2013		14,950		204,824

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ORGANIZATION

9 Months Ended

Sep. 30, 2013

ORGANIZATION

ORGANIZATION

NOTE 1. ORGANIZATION

KKR Financial Holdings LLC together with its subsidiaries (the “Company”) 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 its 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.

KKR Financial Advisors LLC (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”).

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SECURITIES

9 Months Ended

Sep. 30, 2013

SECURITIES

SECURITIES

NOTE 4. SECURITIES

The Company accounts for securities based on the following categories: (i) securities available-for-sale, which are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive loss; (ii) other securities, at estimated fair value, with unrealized gains and losses recorded in the condensed consolidated statements of operations; and (iii) RMBS, at estimated fair value, with unrealized gains and losses recorded in the condensed consolidated statements of operations.

The following table summarizes the Company’s securities as of September 30, 2013, which are carried at estimated fair value (amounts in thousands):

	September 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale	$	348,582	$	21,863	$	(2,069	)	$	368,376
Other securities, at estimated fair value(1)	62,618		10,929		(1,634		)	71,913
Residential mortgage-backed securities, at estimated fair value(1)	144,640		3,196		(68,450		)	79,386
Total securities	$	555,840	$	35,988	$	(72,153	)	$	519,675

(1) Unrealized gains and losses are recorded in earnings.

The following table summarizes the Company’s securities as of December 31, 2012, which are carried at estimated fair value (amounts in thousands):

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale	$	394,821	$	27,281	$	(9,809	)	$	412,293
Other securities, at estimated fair value(1)	27,991		9,768		(374		)	37,385
Residential mortgage-backed securities, at estimated fair value(1)	171,385		3,762		(91,305		)	83,842
Total securities	$	594,197	$	40,811	$	(101,488	)	$	533,520

(1) Unrealized gains and losses are recorded in earnings.

The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale securities, aggregated by length of time that the individual securities have been in a continuous unrealized loss position as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	Less Than 12 months					12 Months or More					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
September 30, 2013
Securities available-for-sale	$	3,913	$	(125	)	$	28,655	$	(1,944	)	$	32,568	$	(2,069	)
December 31, 2012
Securities available-for-sale	$	45,900	$	(4,398	)	$	37,500	$	(5,411	)	$	83,400	$	(9,809	)

The unrealized losses in the table above are considered to be temporary impairments due to market factors and are not reflective of credit deterioration. The Company considers many factors when evaluating whether impairment is other-than-temporary. For securities available-for-sale included in the table above, the Company does not intend to sell them and does not believe that it is more likely than not that the Company will be required to sell any of its securities available-for-sale prior to recovery. In addition, based on the analyses performed by the Company on each of its securities available-for-sale, the Company believes that it is able to recover the entire amortized cost amount of the securities available-for-sale included in the table above.

During the three and nine months ended September 30, 2013, the Company recognized losses totaling $5.0 million and $17.5 million, respectively, for securities available-for-sale that it determined to be other-than-temporarily impaired. During the three and nine months ended September 30, 2012, the Company recognized losses totaling $7.4 million and $8.2 million, respectively, for securities available-for-sale that it determined to be other-than-temporarily impaired. The Company intends to sell these securities and as a result, the entire amount of the loss is recorded through earnings in net realized and unrealized gain on investments in the condensed consolidated statements of operations.

For common and preferred stock, the Company considers many factors when evaluating whether impairment is other-than-temporary, including its intent and ability to hold the common and preferred stock for a period of time sufficient for recovery to cost. If the Company believes it will not recover the cost basis based on its intent or ability, an other-than-temporary loss will be recorded through earnings in net realized and unrealized gain on investments in the condensed consolidated statements of operations.

During both the three and nine months ended September 30, 2013, the Company recognized no losses for common and preferred stock that it determined to be other-than-temporarily impaired. As of September 30, 2013, the Company had no investments in common or preferred stock. During the three and nine months ended September 30, 2012, the Company recognized zero and $0.2 million of losses for common and preferred stock that it determined to be other-than-temporarily impaired.

As of September 30, 2013, the Company had a corporate debt security from one issuer in default with an estimated fair value of $23.6 million, which was on non-accrual status. As of December 31, 2012, the Company had no corporate debt securities in default.

Securities available-for-sale sold at a loss typically include those that the Company determined to be other-than-temporarily impaired or had deterioration in credit quality. The following table shows the net realized gains on the sales of securities available-for-sale (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Gross realized gains	$	—	$	42,108	$	2,829		$	77,075
Gross realized losses	—		—		(6		)	(12		)
Net realized gains(1)	$	—	$	42,108	$	2,823		$	77,063

(1) Excludes net realized gains from paydowns and restructurings totaling zero and $2.4 million, including a $1.6 million premium on bond redemption, for the three and nine months ended September 30, 2013, respectively. Excludes net realized losses and gains from paydowns and restructurings totaling $(0.3) million, including a $0.4 million loss on bond redemption, and $16.0 million, including a $0.4 million premium on bond redemption, for the three and nine months ended September 30, 2012, respectively. Also, excludes an impairment charge of $5.0 million and $17.5 million for investments which were determined to be other-than-temporarily impaired for the three and nine months ended September 30, 2013, respectively. Comparatively, excludes an impairment charge of $7.4 million and $8.4 million for investments which were determined to be other-than-temporarily impaired for the three and nine months ended September 30, 2012, respectively.

Concentration Risk

The Company’s corporate debt securities portfolio, which includes securities available-for-sale and other securities at estimated fair value, has certain credit risk concentrated in a limited number of issuers. As of September 30, 2013, approximately 50% of the estimated fair value of the Company’s corporate debt securities portfolio was concentrated in ten issuers, with the three largest concentrations of debt securities in securities issued by NXP Semiconductor NV, Avaya, Inc. and Catalina Marketing Corp., which combined represented $82.9 million, or approximately 19% of the estimated fair value of the Company’s corporate debt securities. As of December 31, 2012, approximately 51% of the estimated fair value of the Company’s corporate debt securities portfolio, was concentrated in ten issuers, with the three largest concentrations of debt securities in securities issued by Sanmina Corporation, Avaya, Inc. and iPayment, Inc., which combined represented $87.0 million, or approximately 19% of the estimated fair value of the Company’s corporate debt securities.

Pledged Assets

Note 7 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged securities for borrowings. The following table summarizes the estimated fair value of securities available-for-sale pledged as collateral as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013		As of December 31, 2012
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	327,210	$	354,088
Total	$	327,210	$	354,088

As of September 30, 2013 and December 31, 2012, no other securities, at estimated fair value or RMBS were pledged as collateral for the Company’s borrowings.

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Dec. 31, 2011
Assets:
Corporate loans held for sale	$ 312,312		$ 128,289
Allowances for loan losses	212,594		223,472
Liabilities:
Convertible senior notes			166,028
Senior notes	362,251		362,178
Junior subordinated notes	283,517		283,517
Corporate loans
Assets:
Allowances for loan losses	212,594	203,255	223,472	225,882	235,807	191,407
Corporate loans held for sale
Assets:
Corporate loans held for sale	312,300		128,300	137,900
Nonaffiliates
Liabilities:
Collateralized loan obligation secured debt	4,903,438		5,122,338
Affiliates
Liabilities:
Collateralized loan obligation junior secured notes to affiliates	193,921		296,557
Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Cash, restricted cash, and cash equivalents	731,674		1,134,002
Liabilities:
Senior notes	394,508		412,126
Significant Other Observable Inputs (Level 2)
Assets:
Other assets	11,378		16,439
Liabilities:
Convertible senior notes			268,238
Significant Other Observable Inputs (Level 2) | Corporate loans
Assets:
Corporate loans, net of allowance for loan losses of $212,594 as of September 30, 2013 and $223,472 as of December 31,2012	5,319,139		5,203,763
Significant Other Observable Inputs (Level 2) | Corporate loans held for sale
Assets:
Corporate loans held for sale	300,178		151,327
Significant Unobservable Inputs (Level 3)
Assets:
Private equity investments, at cost	2,621		1,635
Other assets			338
Liabilities:
Credit facilities	48,489		107,789
Junior subordinated notes	138,073		134,351
Significant Unobservable Inputs (Level 3) | Corporate loans
Assets:
Corporate loans, net of allowance for loan losses of $212,594 as of September 30, 2013 and $223,472 as of December 31,2012	419,341		627,455
Significant Unobservable Inputs (Level 3) | Corporate loans held for sale
Assets:
Corporate loans held for sale	13,427		43,751
Significant Unobservable Inputs (Level 3) | Nonaffiliates
Liabilities:
Collateralized loan obligation secured debt	4,832,415		5,020,115
Significant Unobservable Inputs (Level 3) | Affiliates
Liabilities:
Collateralized loan obligation junior secured notes to affiliates	171,175		290,948
Carrying Amount
Assets:
Cash, restricted cash, and cash equivalents	731,674		1,134,002
Private equity investments, at cost	405		405
Other assets	11,083		17,148
Liabilities:
Credit facilities	48,489		107,789
Convertible senior notes			166,028
Senior notes	362,251		362,178
Junior subordinated notes	283,517		283,517
Carrying Amount | Corporate loans
Assets:
Corporate loans, net of allowance for loan losses of $212,594 as of September 30, 2013 and $223,472 as of December 31,2012	5,684,165		5,783,689
Carrying Amount | Corporate loans held for sale
Assets:
Corporate loans held for sale	312,312		128,289
Carrying Amount | Nonaffiliates
Liabilities:
Collateralized loan obligation secured debt	4,903,438		5,122,338
Carrying Amount | Affiliates
Liabilities:
Collateralized loan obligation junior secured notes to affiliates	193,921		296,557
Estimated Fair Value
Assets:
Cash, restricted cash, and cash equivalents	731,674		1,134,002
Private equity investments, at cost	2,621		1,635
Other assets	11,378		16,777
Liabilities:
Credit facilities	48,489		107,789
Convertible senior notes			268,238
Senior notes	394,508		412,126
Junior subordinated notes	138,073		134,351
Estimated Fair Value | Corporate loans
Assets:
Corporate loans, net of allowance for loan losses of $212,594 as of September 30, 2013 and $223,472 as of December 31,2012	5,738,480		5,831,218
Estimated Fair Value | Corporate loans held for sale
Assets:
Corporate loans held for sale	313,605		195,078
Estimated Fair Value | Nonaffiliates
Liabilities:
Collateralized loan obligation secured debt	4,832,415		5,020,115
Estimated Fair Value | Affiliates
Liabilities:
Collateralized loan obligation junior secured notes to affiliates	$ 171,175		$ 290,948

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2013

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of the Company and entities established to complete secured financing transactions that are considered to be variable interest entities (“VIEs”) and for which the Company is the primary beneficiary.

Certain prior period information has been reclassified to conform to the current year presentation to provide additional detailed information related to the Company’s oil and gas costs as a result of the growth in the Company’s oil and gas business. These costs were previously included in general, administrative and directors expenses.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from management’s estimates.

The Company uses historical experience and various other assumptions and information that are believed to be reasonable under the circumstances in developing its estimates and judgments. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. While the Company believes that the estimates and assumptions used in the preparation of the condensed consolidated financial statements are appropriate, actual results could differ from those estimates.

Estimates of oil, natural gas and natural gas liquid (“NGL”) reserves and their values, future production rates and future costs and expenses are inherently uncertain, including many factors beyond the Company’s control. Reservoir engineering is a subjective process of estimating underground accumulations of oil, natural gas and NGL that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions and the judgments of the individuals preparing the estimates. In addition, reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of oil, natural gas and NGL eventually recovered, and could materially affect the Company’s future depreciation, depletion and amortization expense (“DD&A”), its asset retirement obligations or impairment considerations.

Consolidation

KKR Financial CLO 2005-1, Ltd. (“CLO 2005-1”), KKR Financial CLO 2005-2, Ltd. (“CLO 2005-2”), KKR Financial CLO 2006-1, Ltd. (“CLO 2006-1”), KKR Financial CLO 2007-1, Ltd. (“CLO 2007-1”), KKR Financial CLO 2007-A, Ltd. (“CLO 2007-A”), KKR Financial CLO 2011-1, Ltd. (“CLO 2011-1”), KKR Financial CLO 2012-1, Ltd. (“CLO 2012-1”), and KKR Financial CLO 2013-1, Ltd. (“CLO 2013-1”) (collectively the “Cash Flow CLOs”) are entities established to complete secured financing transactions. These entities are VIEs which the Company consolidates as the Company has determined it has the power to direct the activities that most significantly impact these entities’ economic performance and the Company has both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities. In CLO transactions, subordinated notes have the first risk of loss and conversely, the residual value upside of the transactions.

The Company finances the majority of its corporate debt investments through its CLOs. As of September 30, 2013, the Company’s eight CLOs held $6.5 billion par amount, or $6.2 billion estimated fair value, of corporate debt investments. As of December 31, 2012, the Company had seven CLOs that held $6.3 billion par amount, or $6.0 billion estimated fair value, of corporate debt investments. The assets in each CLO can be used only to settle the debt of the related CLO. As of September 30, 2013, the aggregate CLO debt totaled $4.9 billion of secured debt outstanding held by unaffiliated third parties and $193.9 million of junior secured notes outstanding held by an affiliate of the Manager.

The Company consolidates all non-VIEs in which it holds a greater than 50 percent voting interest.

In addition, the Company has non-controlling interests in joint ventures and partnerships that do not qualify as VIEs and do not meet the control requirements for consolidation as defined by GAAP.

All inter-company balances and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:

Level 1:  Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets generally included in this category are equity securities listed in active markets.

Level 2:  Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value and certain financial instruments classified as derivatives.

Level 3:  Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value, residential mortgage-backed securities (“RMBS”), certain interests in joint ventures and partnerships and certain financial instruments classified as derivatives.

A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which the Company recognizes at the end of the reporting period.

Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that the Company and others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, the Company does not require that fair value always be a predetermined point in the bid-ask range. The Company’s policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets the Company’s best estimate of fair value.

Depending on the relative liquidity in the markets for certain assets, the Company may transfer assets to Level 3 if it determines that observable quoted prices, obtained directly or indirectly, are not available. The valuation techniques used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.

Securities and Corporate Loans, at Estimated Fair Value:  Securities and corporate loans, at estimated fair value are initially valued at transaction price and are subsequently valued using market data for similar instruments (e.g., recent transactions or broker quotes), comparisons to benchmark derivative indices or valuation models. Valuation models are based on yield analysis techniques, where the key inputs are based on relative value analyses, which incorporate similar instruments from similar issuers. In addition, an illiquidity discount is applied where appropriate.

Equity Investments, at Estimated Fair Value:  Equity investments, at estimated fair value, are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on market and income (discounted cash flow) approaches, in which various internal and external factors are considered. Factors include key financial inputs and recent public and private transactions for comparable investments. Key inputs used for the discounted cash flow approach include the weighted average cost of capital and assumed inputs used to calculate terminal values, such as earnings before interest, taxes, depreciation and amortization (“EBIDTA”) exit multiples. The fair value recorded for a particular investment will generally be within the range suggested by the two approaches. Upon completion of the valuations conducted, an illiquidity discount is applied where appropriate.

Interests in Joint Ventures and Partnerships:  Interests in joint ventures and partnerships include certain equity investments related to the oil and gas and commercial real estate sectors. Interests in joint ventures and partnerships are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on an income (discounted cash flow) approach, in which various internal and external factors are considered and key inputs include the weighted average cost of capital. In addition, an illiquidity discount is applied where appropriate.

Over-the-counter (“OTC”) Derivative Contracts:  OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit standing of reference entities, and equity prices. OTC derivatives are initially valued using quoted market prices, if available, or models using a series of techniques, including closed-form analytic formulae, such as the Black-Scholes option-pricing model, and/or simulation models in the absence of quoted market prices. Many pricing models employ methodologies that have pricing inputs observed from actively quoted markets, as is the case for generic interest rate swap and option contracts.

Residential Mortgage-Backed Securities, at Estimated Fair Value:  RMBS are initially valued at transaction price and are subsequently valued using a third party valuation servicer. The most significant inputs to the valuation of these instruments are default and loss expectations and constant prepayment rates.

Key unobservable inputs that have a significant impact on the Company’s Level 3 valuations as described above are included in Note 13 to these condensed consolidated financial statements. The Company utilizes several unobservable pricing inputs and assumptions in determining the fair value of its Level 3 investments. These unobservable pricing inputs and assumptions may differ by asset and in the application of the Company’s valuation methodologies. The reported fair value estimates could vary materially if the Company had chosen to incorporate different unobservable pricing inputs and other assumptions or, for applicable investments, if the Company only used either the discounted cash flow methodology or the market comparables methodology instead of assigning a weighting to both methodologies.

Valuation Process

The valuation process involved in Level 3 measurements for assets and liabilities is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The Company utilizes a valuation committee, whose members consist of the Company’s Chief Executive Officer, Chief Financial Officer, General Counsel and certain other employees of the Manager. The valuation committee is responsible for coordinating and implementing the Company’s quarterly valuation process. For assets classified as Level 3, the investment professionals are responsible for documenting preliminary valuations based on various factors including their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and model projections discussed above. The Company engages an independent valuation firm to opine on its internal valuation assessments for certain holdings over a specific dollar threshold. All valuations are approved by the valuation committee.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash held in banks and highly liquid investments with original maturities of three months or less. Interest income earned on cash and cash equivalents is recorded in other within total revenues on the condensed consolidated statements of operations.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents represent amounts that are held by third parties under certain of the Company’s financing and derivative transactions. Interest income earned on restricted cash and cash equivalents is recorded in other within total revenues on the condensed consolidated statements of operations.

On the condensed consolidated statement of cash flows, net additions or reductions to restricted cash and cash equivalents are classified as an investing activity as restricted cash and cash equivalents reflect the receipts from collections or sales of investments, as well as payments made to acquire investments held by third parties.

Securities

Securities Available-for-Sale

The Company classifies its investments in securities as available-for-sale as the Company may sell them prior to maturity and does not hold them principally for the purpose of selling them in the near term. These investments are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive loss. Estimated fair values are based on quoted market prices, when available, on estimates provided by independent pricing sources or dealers who make markets in such securities, or internal valuation models when external sources of fair value are not available. Upon the sale of a security, the realized net gain or loss is computed on a weighted average cost basis. Purchases and sales of securities are recorded on the trade date.

The Company monitors its available-for-sale securities portfolio for impairments. A loss is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. The Company considers many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost and the severity of the decline, the amount of the unrealized loss, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. In addition, for debt securities, the Company considers its intent to sell the debt security, the Company’s estimation of whether or not it expects to recover the debt security’s entire amortized cost if it intends to hold the debt security, and whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery. For equity securities, the Company also considers its intent and ability to hold the equity security for a period of time sufficient for a recovery in value.

The amount of the loss that is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary is dependent on certain factors. If the security is an equity security or if the security is a debt security that the Company intends to sell or estimates that it is more likely than not that the Company will be required to sell before recovery of its amortized cost, then the impairment amount recognized in earnings is the entire difference between the estimated fair value of the security and its amortized cost. For debt securities that the Company does not intend to sell or estimates that it is not more likely than not to be required to sell before recovery, the impairment is separated into the estimated amount relating to credit loss and the estimated amount relating to all other factors. Only the estimated credit loss amount is recognized in earnings, with the remainder of the loss amount recognized in accumulated other comprehensive loss.

Unamortized premiums and unaccreted discounts on securities available-for-sale are recognized in interest income over the contractual life, adjusted for actual prepayments, of the securities using the effective interest method.

Other Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain securities for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these securities. Other securities, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Residential Mortgage-Backed Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for its residential mortgage investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of its residential mortgage investments. RMBS, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Equity Investments, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain marketable equity securities and private equity investments. The Company elects the fair value option of accounting for private equity investments received through restructuring debt transactions or issued by an entity in which the Company may have significant influence. The Company elected the fair value option for certain equity investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these equity investments. Equity investments, at fair value, are managed based on overall value and potential returns. These equity investments carried at estimated fair value are presented separately on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Interests in Joint Ventures and Partnerships

The Company has elected the fair value option of accounting for certain non-controlling interests in joint ventures and partnerships, for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these interests. These interests in joint ventures and partnerships are presented within other assets on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased consist of equity and debt securities that the Company has sold short. In order to facilitate a short sale, the Company borrows the securities from another party and delivers the securities to the buyer. The Company will be required to “cover” its short sale in the future through the purchase of the security in the market at the prevailing market price and deliver it to the counterparty from which it borrowed. The Company is exposed to a loss to the extent that the security price increases during the time from when the Company borrowed the security to when the Company purchases it in the market to cover the short sale. Securities sold, not yet purchased are presented within accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets with gains and losses reported in net realized and unrealized gains on investments on the condensed consolidated statement of operations.

Corporate Loans, Net

Corporate Loans

Corporate loans are generally held for investment and the Company initially records loans at their purchase prices. The Company subsequently accounts for loans based on their outstanding principal plus or minus unaccreted purchase discounts and unamortized purchase premiums. Corporate loans that the Company transfers to held for sale are transferred at the lower of cost or estimated fair value.

Interest income on loans includes interest at stated coupon rates adjusted for accretion of purchase discounts and the amortization of purchase premiums. Unamortized premiums and unaccreted discounts are recognized in interest income over the contractual life, adjusted for actual prepayments, of the loans using the effective interest method.

Other than loans which are measured at fair value, loans acquired with deteriorated credit quality are recorded at initial cost and interest income is recognized as the difference between the Company’s estimate of all cash flows that it will receive from the loan in excess of its initial investment on a level-yield basis over the life of the loan (accretable yield) using the effective interest method.

A loan is typically placed on non-accrual status at such time as: (i) management believes that scheduled debt service payments may not be paid when contractually due; (ii) the loan becomes 90 days delinquent; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the collateral securing the loan decreases below the Company’s carrying value of such loan. As such, loans placed on non-accrual status may or may not be contractually past due at the time of such determination. While on non-accrual status, previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using the cost-recovery method, cash-basis method or some combination of the two methods. A loan is placed back on accrual status when the ultimate collectability of the principal and interest is not in doubt.

The Company may modify corporate loans in transactions where the borrower is experiencing financial difficulty and a concession is granted to the borrower as part of the modification. These concessions may include one or a combination of the following: a reduction of the stated interest rate; payment extensions; forgiveness of principal; or an exchange of assets. Such modifications typically qualify as troubled debt restructurings (“TDRs”). In order to determine whether the borrower is experiencing financial difficulty, an evaluation is performed including the following considerations: whether the borrower is or will be in payment default on any of his or her debt in the foreseeable future without the modification; whether there is a potential for a bankruptcy filing; whether there is a going-concern issue; or whether the borrower is unable to secure financing elsewhere. The Company may also identify receivables that are newly considered impaired and discloses the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired.

Loans whose terms have been modified in a TDR are considered impaired, unless accounted for at fair value or the lower of cost or estimated fair value, and are typically placed on non-accrual status, but can be moved to accrual status when, among other criteria, payment in full of all amounts due under the restructured terms is expected and the borrower has demonstrated a sustained period of repayment performance, typically six months.

TDRs are separately identified for impairment disclosures and are measured at either the fair market value or the present value of estimated future cash flows using the respective loan’s effective rate at inception. Impairments associated with TDRs are included within the allocated component of the Company’s allowance for loan losses.

In addition, the Company may also modify corporate loans which usually involve changes in existing interest rates combined with changes of existing maturities to prevailing market rates/maturities for similar instruments at the time of modification. Such modifications typically do not meet the definition of a TDR since the respective borrowers are neither experiencing financial difficulty nor are seeking a concession as part of the modification.

The corporate loans the Company invests in are generally deemed in default upon the non-payment of a single interest payment or as a result of the violation of a covenant in the respective loan agreement. The Company charges-off a portion or all of its amortized cost basis in a corporate loan when it determines that it is uncollectible due to either: (i) the estimation based on a recovery value analysis of a defaulted loan that less than the amortized cost amount will be recovered through the agreed upon restructuring of the loan or as a result of a bankruptcy process of the issuer of the loan; or (ii) the determination by the Company to transfer a loan to held for sale with the loan having an estimated market value below the amortized cost basis of the loan.

Allowance for Loan Losses

The Company’s corporate loan portfolio is comprised of a single portfolio segment which includes one class of financing receivables, that is, high yield loans that are typically purchased via assignment or participation in either the primary or secondary market and are held primarily for investment. High yield loans are generally characterized as having below investment grade ratings or being unrated.

The Company’s allowance for loan losses represents its estimate of probable credit losses inherent in its corporate loan portfolio held for investment as of the balance sheet date. Estimating the Company’s allowance for loan losses involves a high degree of management judgment and is based upon a comprehensive review of the Company’s loan portfolio that is performed on a quarterly basis. The Company’s allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses pertains to specific loans that the Company has determined are impaired. The Company determines a loan is impaired when management estimates that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis the Company performs a comprehensive review of its entire loan portfolio and identifies certain loans that it has determined are impaired. Once a loan is identified as being impaired, the Company places the loan on non-accrual status, unless the loan is already on non-accrual status, and records an allowance that reflects management’s best estimate of the loss that the Company expects to recognize from the loan. The expected loss is estimated as being the difference between the Company’s current cost basis of the loan, including accrued interest receivable, and the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the loan’s observable estimated fair value may be used. The Company also estimates the probable credit losses inherent in its unfunded loan commitments as of the balance sheet date. Any credit loss reserve for unfunded loan commitments is recorded in accounts payable, accrued expenses and other liabilities on the Company’s condensed consolidated balance sheets.

The unallocated component of the Company’s allowance for loan losses represents its estimate of probable losses inherent in the loan portfolio as of the balance sheet date where the specific loan that the loan loss relates to is indeterminable. The Company estimates the unallocated component of the allowance for loan losses through a comprehensive review of its loan portfolio and identifies certain loans that demonstrate possible indicators of impairment, including internally assigned credit quality indicators. This assessment excludes all loans that are determined to be impaired and as a result, an allocated reserve has been recorded as described in the preceding paragraph. Such indicators include the current and/or forecasted financial performance and liquidity profile of the issuer, specific industry or economic conditions that may impact the issuer, and the observable trading price of the loan if available. All loans are first categorized based on their assigned risk grade and further stratified based on the seniority of the loan in the issuer’s capital structure. The seniority classifications assigned to loans are senior secured, second lien and subordinate. Senior secured consists of loans that are the most senior debt in an issuer’s capital structure and therefore have a lower estimated loss severity than other debt that is subordinate to the senior secured loan. Senior secured loans often have a first lien on some or all of the issuer’s assets. Second lien consists of loans that are secured by a second lien interest on some or all of the issuer’s assets; however, the loan is subordinate to the first lien debt in the issuer’s capital structure. Subordinate consists of loans that are generally unsecured and subordinate to other debt in the issuer’s capital structure.

There are three internally assigned risk grades that are applied to loans that have not been identified as being impaired: high, moderate and low. High risk means that there is evidence of possible loss due to the financial or operating performance and liquidity of the issuer, industry or economic concerns specific to the issuer, or other factors that indicate that the breach of a covenant contained in the related loan agreement is possible. Moderate risk means that while there is not observable evidence of possible loss, there are issuer and/or industry specific trends that indicate a loss may have occurred. Low risk means that while there is no identified evidence of loss, there is the risk of loss inherent in the loan that has not been identified. All loans held for investment, with the exception of loans that have been identified as impaired, are assigned a risk grade of high, moderate or low.

The Company applies a range of default and loss severity estimates in order to estimate a range of loss outcomes upon which to base its estimate of probable losses that results in the determination of the unallocated component of the Company’s allowance for loan losses.

Corporate Loans Held for Sale

From time to time the Company makes the determination to transfer certain of its corporate loans from held for investment to held for sale. The decision to transfer a loan to held for sale is generally as a result of the Company determining that the respective loan’s credit quality in relation to the loan’s expected risk-adjusted return no longer meets the Company’s investment objective and/or the Company deciding to reduce or eliminate its exposure to a particular loan for risk management purposes. Corporate loans held for sale are stated at lower of cost or estimated fair value and are assessed on an individual basis. Prior to transferring a loan to held for sale, any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to the yield by the interest method. The loan is transferred from held for investment to held for sale at the lower of its cost or estimated fair value and is carried at the lower of its cost or estimated fair value thereafter. Subsequent to transfer and while the loan is held for sale, recognition as an adjustment to yield by the interest method is discontinued for any difference between the carrying amount of the loan and its outstanding principal balance.

From time to time the Company also makes the determination to transfer certain of its corporate loans from held for sale back to held for investment. The decision to transfer a loan back to held for investment is generally as a result of the circumstances that led to the initial transfer to held for sale no longer being present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy. The loan is transferred from held for sale back to held for investment at the lower of its cost or estimated fair value, whereby a new cost basis is established based on this amount.

Interest income on corporate loans held for sale is recognized through accrual of the stated coupon rate for the loans, unless the loans are placed on non-accrual status, at which point previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using either the cost-recovery method or on a cash-basis.

Corporate Loans, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain corporate loans for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these corporate loans. Corporate loans carried at estimated fair value are included within corporate loans, net on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statement of operations.

Oil and Natural Gas Properties

Oil and natural gas producing activities are accounted for under the successful efforts method of accounting. Under this method, exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found. Lease acquisition costs are capitalized when incurred. Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs and costs of certain nonproducing leasehold costs are expensed as incurred.

Expenditures for repairs and maintenance are charged to expense as incurred.

The capitalized costs of producing oil and natural gas properties are depleted on a field-by-field basis using the units-of production method based on the ratio of current production to estimated total net proved oil, natural gas and NGL reserves. Proved developed reserves are used in computing depletion rates for drilling and development costs and total proved reserves are used for depletion rates of leasehold costs.

Estimated dismantlement and abandonment costs for oil and natural gas properties, net of salvage value, are capitalized at their estimated net present value and amortized on a unit-of-production basis over the remaining life of the related proved developed reserves.

Oil and Gas Revenue Recognition

Oil, natural gas and NGL revenues are recognized when production is sold to a purchaser at fixed or determinable prices, when delivery has occurred and title has transferred and collectability of the revenue is reasonably assured. The Company follows the sales method of accounting for natural gas revenues. Under this method of accounting, revenues are recognized based on volumes sold, which may differ from the volume to which we are entitled based on the Company’s working interest. An imbalance is recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the under-produced owners to recoup its entitled share through future production. Under the sales method, no receivables are recorded when the Company has taken less than its share of production and no payables are recorded when the Company has taken more than its share of production.

Long-Lived Assets

The Company evaluates its proved oil and natural gas properties and related equipment and facilities for impairment on a field-by-field basis, whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, future operating costs and a discount rate commensurate with the risk on the properties and cost of capital. Unproved oil and natural gas properties are assessed periodically and, at a minimum, annually on a property-by-property basis, and any impairment in value is recognized when incurred.

Borrowings

The Company finances the majority of its investments through the use of secured borrowings in the form of securitization transactions structured as non-recourse secured financings and other secured and unsecured borrowings. In addition, the Company finances certain of its oil and gas asset acquisitions through borrowings. The Company recognizes interest expense on all borrowings on an accrual basis.

Trust Preferred Securities

Trusts formed by the Company for the sole purpose of issuing trust preferred securities are not consolidated by the Company as the Company has determined that it is not the primary beneficiary of such trusts. The Company’s investment in the common securities of such trusts is included within other assets on the condensed consolidated balance sheets.

Preferred Shares

Distributions on the Company’s 7.375% Series A LLC Preferred Shares (“Series A LLC Preferred Shares”) are cumulative and payable quarterly when and if declared by the Company’s board of directors at a 7.375% rate per annum. The Company accrues for the distribution upon declaration and is included within accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets.

Derivative Instruments

The Company recognizes all derivatives on the condensed consolidated balance sheet at estimated fair value. On the date the Company enters into a derivative contract, the Company designates and documents each derivative contract as one of the following at the time the contract is executed: (i) a hedge of a recognized asset or liability (“fair value” hedge); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (iii) a hedge of a net investment in a foreign operation; or (iv) a derivative instrument not designated as a hedging instrument (“free-standing derivative”). For a fair value hedge, the Company records changes in the estimated fair value of the derivative instrument and, to the extent that it is effective, changes in the fair value of the hedged asset or liability in the current period earnings in the same financial statement category as the hedged item. For a cash flow hedge, the Company records changes in the estimated fair value of the derivative to the extent that it is effective in accumulated other comprehensive loss and subsequently reclassifies these changes in estimated fair value to net income in the same period(s) that the hedged transaction affects earnings. The effective portion of the cash flow hedges is recorded in the same financial statement category as the hedged item. For free-standing derivatives, the Company reports changes in the fair values in other income.

The Company formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Company’s evaluation of effectiveness of its hedged transactions. Periodically, the Company also formally assesses whether the derivative it designated in each hedging relationship is expected to be and has been highly effective in offsetting changes in estimated fair values or cash flows of the hedged item using either the dollar offset or the regression analysis method. If the Company determines that a derivative is not highly effective as a hedge, it discontinues hedge accounting.

Foreign Currency

The Company makes investments in non-United States dollar denominated securities and loans. As a result, the Company is subject to the risk of fluctuation in the exchange rate between the United States dollar and the foreign currency in which it makes an investment. In order to reduce the currency risk, the Company may hedge the applicable foreign currency. All investments denominated in a foreign currency are converted to the United States dollar using prevailing exchange rates on the balance sheet date.

Income, expenses, gains and losses on investments denominated in a foreign currency are converted to the United States dollar using the prevailing exchange rates on the dates when they are recorded. Foreign exchange gains and losses are recorded in the condensed consolidated statements of operations.

Manager Compensation

The Management Agreement provides for the payment of a base management fee to the Manager, as well as an incentive fee if the Company’s financial performance exceeds certain benchmarks. Additionally, the Management Agreement provides for the Manager to be reimbursed for certain expenses incurred on the Company’s behalf. The base management fee and the incentive fee are accrued and expensed during the period for which they are earned by the Manager.

Share-Based Compensation

The Company accounts for share-based compensation issued to its directors and to its Manager using the fair value based methodology in accordance with relevant accounting guidance. Compensation cost related to restricted common shares issued to the Company’s directors is measured at its estimated fair value at the grant date, and is amortized and expensed over the vesting period on a straight-line basis. Compensation cost related to restricted common shares and common share options issued to the Manager is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards are unvested. The Company has elected to use the graded vesting attribution method to amortize compensation expense for the restricted common shares and common share options granted to the Manager.

Income Taxes

The Company intends to continue to operate so as to qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation. Therefore, the Company generally is not subject to United States federal income tax at the entity level, but is subject to limited state and foreign taxes. Holders of the Company’s common and preferred shares will be required to take into account their allocable share of each item of the Company’s income, gain, loss, deduction, and credit for the taxable year of the Company ending within or with their taxable year.

The Company owns equity interests in entities that have elected or intend to elect to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). A REIT generally is not subject to United States federal income tax to the extent that it currently distributes its income and satisfies certain asset, income and ownership tests, and recordkeeping requirements, but it may be subject to some amount of federal, state, local and foreign taxes based on its taxable income.

The Company has wholly-owned domestic and foreign subsidiaries that are taxable as corporations for United States federal income tax purposes and thus are not consolidated with the Company for United States federal income tax purposes. For financial reporting purposes, current and deferred taxes are provided for on the portion of earnings recognized by the Company with respect to its interest in the domestic taxable corporate subsidiaries, because each is taxed as a regular corporation under the Code. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP consolidated financial statements and the United States federal income tax basis of assets and liabilities as of each consolidated balance sheet date. The foreign corporate subsidiaries were formed to make certain foreign and domestic investments from time to time. The foreign corporate subsidiaries are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands, and are anticipated to be exempt from United States federal and state income tax at the corporate entity level because they restrict their activities in the United States to trading in stock and securities for their own account. However, the Company will be required to include their current taxable income in the Company’s calculation of its taxable income allocable to shareholders.

The Company must recognize the tax impact from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax impact recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain tax positions are recorded as tax expense. Significant judgment is required in the identification of uncertain tax positions and in the estimation of penalties and interest on uncertain tax positions. If it is determined that recognition for an uncertain tax provision is necessary, the Company would record a liability for an unrecognized tax expense from an uncertain tax position taken or expected to be taken.

Earnings Per Common Share

The Company presents both basic and diluted earnings per common share (“EPS”) in its condensed consolidated financial statements and footnotes thereto. Basic earnings per common share (“Basic EPS”) excludes dilution and is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares, including vested restricted common shares, outstanding for the period. The Company calculates EPS using the more dilutive of the two-class method or the if-converted method. The two-class method is an earnings allocation formula that determines EPS for common shares and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS using the two-class method. Accordingly, all earnings (distributed and undistributed) are allocated to common shares, preferred shares and participating securities based on their respective rights to receive dividends. Diluted earnings per common share (“Diluted EPS”) reflects the potential dilution of common share options, unvested restricted common shares and convertible senior notes using the treasury method or if-converted method.

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SECURITIES (Details 4) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Concentrated risks
Number of issuers with whom a specified percentage of estimated fair value of corporate debt securities is concentrated	10	10
Number of largest issuers out of ten issuers with whom a specified percentage of estimated fair value of debt securities is concentrated	3	3
Securities	$ 368,376	$ 412,293
Estimated fair value of securities pledged as collateral
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	327,210	354,088
Total	327,210	354,088
Other securities, at estimated fair value or RMBS pledged as collateral	0	0
Corporate debt securities | Credit concentration | Top three largest
Concentrated risks
Concentration risk (as a percent)	19.00%	19.00%
Securities	$ 82,900	$ 87,000
Corporate debt securities | Credit concentration | Ten issuers
Concentrated risks
Concentration risk (as a percent)	50.00%	51.00%

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BORROWINGS (Tables)

9 Months Ended

Sep. 30, 2013

BORROWINGS

Schedule of Company's borrowings

Certain information with respect to the Company’s borrowings as of September 30, 2013 is summarized in the following table (dollar amounts in thousands):

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Collateral(1)
CLO 2005-1 senior secured notes	$	203,361	0.75	%	1,304	$	320,391
CLO 2005-2 senior secured notes	346,465		0.65		1,518	501,943
CLO 2006-1 senior secured notes	405,610		0.70		1,790	665,778
CLO 2007-1 senior secured notes	2,075,040		0.82		2,784	2,428,708
CLO 2007-1 mezzanine notes	292,466		3.37		2,784	342,313
CLO 2007-1 subordinated notes(2)	5,828		19.29		2,784	6,821
CLO 2007-A senior secured notes	448,841		1.57		1,476	557,795
CLO 2007-A mezzanine notes	21,632		7.02		1,476	26,882
CLO 2007-A subordinated notes(2)	4,599		47.00		1,476	5,715
CLO 2011-1 senior debt	266,266		1.62		1,780	319,601
CLO 2012-1 senior secured notes	362,618		2.35		4,094	370,187
CLO 2012-1 subordinated notes(2)	21,500		8.50		4,094	21,949
CLO 2013-1 senior secured notes	449,212		2.04		4,306	368,449
Total collateralized loan obligation secured debt	4,903,438					5,936,532
CLO 2007-1 mezzanine notes to affiliates	32,160		9.76		2,784	37,641
CLO 2007-1 subordinated notes to affiliates(2)	130,270		19.29		2,784	152,473
CLO 2007-A mezzanine notes to affiliates	20,994		7.77		1,476	26,090
CLO 2007-A subordinated notes to affiliates(2)	10,497		47.00		1,476	13,045
Total collateralized loan obligation junior secured notes to affiliates	193,921					229,249
Senior secured credit facility	—		2.50		791	—
2015 Asset-based borrowing facility	48,489		2.18		766	219,424
2018 Asset-based borrowing facility(3)	—		—		1,611	—
Total credit facilities	48,489					219,424
8.375% Senior notes	250,784		8.38		10,273	—
7.500% Senior notes	111,467		7.50		10,398	—
Junior subordinated notes	283,517		5.41		8,439	—
Total borrowings	$	5,791,616				$	6,385,205

(1) Collateral for borrowings consists of the estimated fair value of certain corporate loans, securities available-for-sale and equity investments at estimated fair value. Also includes the carrying value of oil and gas assets. For purposes of this table, collateral for CLO senior and junior secured notes are calculated pro rata based on the outstanding borrowings for each respective CLO.

(2) Subordinated notes do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from each respective CLO. Accordingly, weighted average borrowing rates for the subordinated notes were calculated based on year-to-date annualized estimated distributions, if any.

(3) Borrowing rates range from 1.75% to 3.25% plus London interbank offered rate (‘‘LIBOR’’) per annum based on the amount outstanding.

Certain information with respect to the Company’s borrowings as of December 31, 2012 is summarized in the following table (dollar amounts in thousands):

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Collateral(1)
CLO 2005-1 senior secured notes	$	427,317	0.69	%	1,577	$	510,187
CLO 2005-2 senior secured notes	470,516		0.66		1,791	618,000
CLO 2006-1 senior secured notes	601,091		0.69		2,063	846,365
CLO 2007-1 senior secured notes	2,075,040		0.86		3,057	2,298,373
CLO 2007-1 mezzanine notes	203,727		2.81		3,057	225,654
CLO 2007-1 subordinated notes(2)	5,828		26.22		3,057	6,455
CLO 2007-A senior secured notes	601,375		1.50		1,749	698,569
CLO 2007-A mezzanine notes	5,580		7.02		1,749	6,482
CLO 2007-A subordinated notes(2)	4,599		60.24		1,749	5,342
CLO 2011-1 senior debt	343,485		1.67		2,053	421,584
CLO 2012-1 senior secured notes(3)	362,280		2.58		4,367	40,180
CLO 2012-1 subordinated notes(2)(3)	21,500		—		4,367	2,351
Total collateralized loan obligation secured debt	5,122,338					5,679,542
CLO 2007-1 mezzanine notes to affiliates	118,845		6.29		3,057	131,636
CLO 2007-1 subordinated notes to affiliates(2)	130,270		25.89		3,057	144,291
CLO 2007-A mezzanine notes to affiliates	36,945		7.53		1,749	42,916
CLO 2007-A subordinated notes to affiliates(2)	10,497		60.24		1,749	12,194
Total collateralized loan obligation junior secured notes to affiliates	296,557					331,037
Senior secured credit facility	—		2.56		1,064	—
2015 Asset-based borrowing facility	107,789		2.71		1,039	227,415
Total credit facilities	107,789					227,415
7.5% Convertible senior notes	166,028		7.50		1,476	—
8.375% Senior notes	250,735		8.38		10,546	—
7.500% Senior notes	111,443		7.50		10,671	—
Junior subordinated notes	283,517		5.43		8,712	—
Total borrowings	$	6,338,407				$	6,237,994

(1) Collateral for borrowings consists of the estimated fair value of certain corporate loans, securities available-for-sale and equity investments at estimated fair value. Also includes the carrying value of oil and gas assets. For purposes of this table, collateral for CLO senior and junior notes are calculated pro rata based on the outstanding borrowing for each respective CLO.

(2) Subordinated notes do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from each respective CLO. Accordingly, weighted average borrowing rates for the subordinated notes were calculated based on year-to-date annualized estimated distributions, if any.

(3) In addition to the fair value of collateral, CLO 2012-1 held $357.7 million of principal cash as of December 31, 2012 as it was closed on December 21, 2012.

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MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS (Tables)

9 Months Ended

Sep. 30, 2013

Management Agreement and Related Party Transactions

Summary of components of related party management compensation

The following table summarizes the components of related party management compensation on the Company’s condensed consolidated statement of operations, which are described in further detail below, for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Base management fees, net	$	4,314	$	6,911	$	23,500	$	21,075
CLO management fees	5,916		1,145		8,429		3,372
Incentive fees	—		17,768		22,742		31,495
Manager share-based compensation	690		778		2,073		1,577
Total related party management compensation	$	10,920	$	26,602	$	56,744	$	57,519

Base Management Fees

Management Agreement and Related Party Transactions

Summary of components of related party management compensation

The table below summarizes the aggregate base management fees for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013			For the three months ended September 30, 2012		For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Base management fees, gross	$	9,799		$	6,911	$	29,216		$	21,075
CLO management fees credit (1)	(3,684		)	—		(3,915		)	—
Other related party fees credit	(1,801		)	—		(1,801		)	—
Total base management fees, net	$	4,314		$	6,911	$	23,500		$	21,075

(1) See “CLO Management Fees” for further discussion.

CLO Management Fees

Management Agreement and Related Party Transactions

Summary of components of related party management compensation

The table below summarizes the aggregate CLO management fees, including the Fee Credits, for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Charged and retained CLO management fees (1)	$	2,232	$	1,145	$	4,514	$	3,372
CLO management fees credit	3,684		—		3,915		—
Total CLO management fees	$	5,916	$	1,145	$	8,429	$	3,372

(1) Represents management fees incurred by the senior and subordinated note holders of a CLO, excluding the Fee Credits received by the Company based on its ownership percentage in the CLO.

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MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Management Agreement and Related Party Transactions
Total related party transaction expense	$ 0	$ 17,800	$ 22,700	$ 31,500
Collateral manager | CLO Management Fees
Management Agreement and Related Party Transactions
Charged and retained CLO management fees	2,232	1,145	4,514	3,372
CLO management fees credit	3,684		3,915
Total related party transaction expense	$ 5,916	$ 1,145	$ 8,429	$ 3,372

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EARNINGS PER COMMON SHARE (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended			9 Months Ended
	Sep. 30, 2013	Mar. 31, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Reconciliation of basic and diluted net income and distributions per common share
Net income	$ 39,886		$ 111,964	$ 224,354	$ 271,217
Less: Preferred share distributions	6,891			20,520
Net income available to common shareholders	32,995		111,964	203,834	271,217
Less: Dividends and undistributed earnings allocated to participating securities	109		355	701	889
Net income allocated to common shareholders	32,886		111,609	203,133	270,328
Basic:
Basic weighted average common shares outstanding (in shares)	204,134,000		177,862,000	201,824,000	177,815,000
Net income per common share (in dollars per share)	$ 0.16		$ 0.63	$ 1.01	$ 1.52
Diluted:
Basic weighted average common shares outstanding (in shares)	204,134,000		177,862,000	201,824,000	177,815,000
Dilutive effect of convertible senior notes (in shares)			5,569,000		4,625,000
Diluted weighted average common shares outstanding (in shares)	204,134,000		183,431,000	201,824,000	182,440,000
Net income per common share (in dollars per share)	$ 0.16		$ 0.61	$ 1.01	$ 1.48
Amount of debt that had been tendered for conversion		$ 172,500		$ 186,254
Number of common shares of the entity issued in exchange of convertible notes (in shares)		26,100,000
Anti-dilutive securities
Anti-dilutive securities excluded from diluted earnings per share calculations (in shares)	1,932,279		1,932,279	1,932,279	1,932,279

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MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Management Agreement and Related Party Transactions
Total related party transaction expense	$ 0	$ 17,800	$ 22,700	$ 31,500
Manager | Base Management Fees
Management Agreement and Related Party Transactions
Base management fees, gross	9,799	6,911	29,216	21,075
CLO management fees credit	(3,684)		(3,915)
Other related party fees credit	(1,801)		(1,801)
Total related party transaction expense	$ 4,314	$ 6,911	$ 23,500	$ 21,075

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BORROWINGS (Details) (USD $) In Thousands, unless otherwise specified							9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	0 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	0 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	0 Months Ended		9 Months Ended	12 Months Ended	0 Months Ended	9 Months Ended						12 Months Ended		9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	0 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2013 Affiliates	Dec. 31, 2012 Affiliates	Sep. 30, 2013 Nonaffiliates	Dec. 31, 2012 Nonaffiliates	Sep. 30, 2013 CLO 2005-1 senior secured notes	Dec. 31, 2012 CLO 2005-1 senior secured notes	Sep. 30, 2013 CLO 2005-2 senior secured notes	Dec. 31, 2012 CLO 2005-2 senior secured notes	Sep. 30, 2013 CLO 2006-1 senior secured notes	Dec. 31, 2012 CLO 2006-1 senior secured notes	Sep. 30, 2013 CLO 2007-1 senior secured notes	Dec. 31, 2012 CLO 2007-1 senior secured notes	Sep. 30, 2013 CLO 2007-1 mezzanine notes Nonaffiliates	Dec. 31, 2012 CLO 2007-1 mezzanine notes Nonaffiliates	Sep. 30, 2013 CLO 2007-1 subordinated notes Nonaffiliates	Dec. 31, 2012 CLO 2007-1 subordinated notes Nonaffiliates	Sep. 30, 2013 CLO 2007-A senior secured notes	Dec. 31, 2012 CLO 2007-A senior secured notes	Sep. 30, 2013 CLO 2007-A mezzanine notes Nonaffiliates	Dec. 31, 2012 CLO 2007-A mezzanine notes Nonaffiliates	Sep. 30, 2013 CLO 2007-A subordinated notes Nonaffiliates	Dec. 31, 2012 CLO 2007-A subordinated notes Nonaffiliates	Sep. 27, 2013 CLO 2011-1 senior debt	Sep. 30, 2013 CLO 2011-1 senior debt	Dec. 31, 2012 CLO 2011-1 senior debt	Sep. 30, 2013 CLO 2012-1 senior secured notes	Dec. 31, 2012 CLO 2012-1 senior secured notes	Dec. 21, 2012 CLO 2012-1 senior secured notes Nonaffiliates	Sep. 30, 2013 CLO 2012-1 subordinated notes	Dec. 31, 2012 CLO 2012-1 subordinated notes	Sep. 30, 2013 CLO 2007-1 mezzanine notes to affiliates Affiliates	Dec. 31, 2012 CLO 2007-1 mezzanine notes to affiliates Affiliates	Sep. 30, 2013 CLO 2007-1 subordinated notes to affiliates Affiliates	Dec. 31, 2012 CLO 2007-1 subordinated notes to affiliates Affiliates	Sep. 30, 2013 CLO 2007-A mezzanine notes to affiliates Affiliates	Dec. 31, 2012 CLO 2007-A mezzanine notes to affiliates Affiliates	Sep. 30, 2013 CLO 2007-A subordinated notes to affiliates Affiliates	Dec. 31, 2012 CLO 2007-A subordinated notes to affiliates Affiliates	Sep. 30, 2013 2015 Facility	Dec. 31, 2012 2015 Facility	Nov. 30, 2012 2015 Facility LIBOR	May 15, 2013 2015 Natural Resources Facility	Sep. 30, 2013 2015 Natural Resources Facility	Dec. 31, 2012 2015 Natural Resources Facility	Feb. 27, 2013 2018 Natural Resources Facility	Sep. 30, 2013 2018 Natural Resources Facility	Sep. 30, 2013 2018 Natural Resources Facility LIBOR	Sep. 30, 2013 2018 Natural Resources Facility Minimum LIBOR	Sep. 30, 2013 2018 Natural Resources Facility Maximum LIBOR	Sep. 30, 2013 Total credit facilities	Dec. 31, 2012 Total credit facilities	Dec. 31, 2012 7.5% Convertible Senior Notes	Jan. 18, 2013 7.5% Convertible Senior Notes	Sep. 30, 2013 8.375% Senior Notes	Dec. 31, 2012 8.375% Senior Notes	Sep. 30, 2013 7.500% Senior notes due March 20, 2042	Dec. 31, 2012 7.500% Senior notes due March 20, 2042	Sep. 30, 2013 Junior subordinated notes	Dec. 31, 2012 Junior subordinated notes	Sep. 30, 2013 CLO 2013-1 senior secured notes	Jun. 25, 2013 CLO 2013-1 senior secured notes Nonaffiliates
Details of Company's borrowings
Collateralized loan obligation secured debt					$ 4,903,438	$ 5,122,338	$ 203,361	$ 427,317	$ 346,465	$ 470,516	$ 405,610	$ 601,091	$ 2,075,040	$ 2,075,040	$ 292,466	$ 203,727	$ 5,828	$ 5,828	$ 448,841	$ 601,375	$ 21,632	$ 5,580	$ 4,599	$ 4,599		$ 266,266	$ 343,485	$ 362,618	$ 362,280		$ 21,500	$ 21,500																														$ 449,212
Collateralized loan obligation junior secured notes to affiliates			193,921	296,557																													32,160	118,845	130,270	130,270	20,994	36,945	10,497	10,497
Senior notes	362,251	362,178																																																						250,784	250,735	111,467	111,443
Credit facilities	48,489	107,789																																											48,489	107,789						48,489	107,789
Convertible senior notes		166,028																																																				166,028	172,500
Junior subordinated notes	283,517	283,517																																																										283,517	283,517
Total borrowings	5,791,616	6,338,407																																																				166,000
Weighted Average Borrowing Rate (as a percent)							0.75%	0.69%	0.65%	0.66%	0.70%	0.69%	0.82%	0.86%	3.37%	2.81%	19.29%	26.22%	1.57%	1.50%	7.02%	7.02%	47.00%	60.24%		1.62%	1.67%	2.35%	2.58%		8.50%		9.76%	6.29%	19.29%	25.89%	7.77%	7.53%	47.00%	60.24%	2.50%	2.56%			2.18%	2.71%				1.75%	3.25%			7.50%		8.38%	8.38%	7.50%	7.50%	5.41%	5.43%	2.04%
Weighted Average Remaining Maturity							1304 days	1577 days	1518 days	1791 days	1790 days	2063 days	2784 days	3057 days	2784 days	3057 days	2784 days	3057 days	1476 days	1749 days	1476 days	1749 days	1476 days	1749 days		1780 days	2053 days	4094 days	4367 days		4094 days	4367 days	2784 days	3057 days	2784 days	3057 days	1476 days	1749 days	1476 days	1749 days	791 days	1064 days			766 days	1039 days		1611 days						1476 days		10273 days	10546 days	10398 days	10671 days	8439 days	8712 days	4306 days
Total borrowings, fair value of collateral	6,385,205	6,237,994	229,249	331,037	5,936,532	5,679,542	320,391	510,187	501,943	618,000	665,778	846,365	2,428,708	2,298,373	342,313	225,654	6,821	6,455	557,795	698,569	26,882	6,482	5,715	5,342		319,601	421,584	370,187	40,180		21,949	2,351	37,641	131,636	152,473	144,291	26,090	42,916	13,045	12,194					219,424	227,415						219,424	227,415									368,449
Principal cash held																													$ 357,700
Debt, variable interest rate basis																									three-month LIBOR					three-month LIBOR													LIBOR	LIBOR	LIBOR		LIBOR		LIBOR														three-month LIBOR

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 9) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended	3 Months Ended		9 Months Ended			9 Months Ended
	Sep. 30, 2013 loan	Sep. 30, 2012	Sep. 30, 2013 loan	Sep. 30, 2012	Dec. 31, 2012 loan	Sep. 30, 2013 Loans held for investment	Sep. 30, 2012 Loans held for investment	Sep. 30, 2013 Loans held for investment loan	Sep. 30, 2012 Loans held for investment	Mar. 31, 2013 Loans held for investment loan	Sep. 30, 2013 Loans at estimated fair value loan
Troubled debt restructurings:
Troubled debt restructurings on a recorded investment basis	$ 61,700,000		$ 61,700,000		$ 25,500,000
Number of TDRs related to recorded investment balance			4		1
Sustained period of repayment performance for determining the reclassification of restructured loans from non-accrual to accrual status			6 months
Troubled debt restructurings, included in non-accrual loans	61,700,000		61,700,000		25,500,000
Specific reserves allocated to the issuer	9,400,000		9,400,000		500,000
Financing Receivable Modifications Extension Period of Maturity Date			4 years
Higher coupon rate for extended period (as a percent)			6.80%
Number of loans			3					2			1
Pre-modification outstanding recorded investment			70,028,000					68,358,000			1,670,000
Post-modification outstanding recorded investment			40,659,000					39,430,000			1,229,000
Estimated fair value of equity received from the TDRs excluded from post-modification outstanding recorded investment	2,100,000		2,100,000
Number of TDRs identified as impaired										2
Charge-offs recorded related to TDR's	0		26,800,000
Charge-offs related to TDR's as a percentage of charge-offs related to loans and losses			86.00%
Charge-offs recorded	0	9,900,000	31,300,000	12,000,000
Number of loans modified as TDRs in default	0		0
Modified amortized cost of corporate loans that did not qualify as TDRs						195,600,000	346,700,000	2,000,000,000	1,400,000,000
Lending commitment to borrower whose loans had been modified in the troubled debt restructuring	$ 0		$ 0

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 4) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013 issuer	Dec. 31, 2012 issuer
Recorded investment in impaired loans and related allowances for credit losses
Number of issuers of loans related to the aggregate allowance on impaired loans	4	6
Impaired Financing Receivable, Recorded Investment
Recorded Investment, with no related allowance recorded		$ 6,490
Recorded Investment, with an allowance recorded	554,541	438,947
Recorded Investment	554,541	445,437
Unpaid Principal Balance, with no related allowance recorded		19,931
Unpaid Principal Balance, with an allowance recorded	594,548	464,214
Unpaid Principal Balance	594,548	484,145
Related Allowance	132,823	94,863
Impaired Financing Receivable, Amortized Cost
Allowances for loan losses	132,823	94,863
Texas Competitive Electric Holdings Company LLC
Impaired Financing Receivable, Recorded Investment
Related Allowance	69,500
Impaired Financing Receivable, Amortized Cost
Impaired loans	311,600
Allowances for loan losses	$ 69,500

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Condensed Consolidated Balance Sheets
Corporate loans, held for sale (in dollars)	$ 312,312	$ 128,289
Corporate loans, estimated fair value (in dollars)	156,595	35,879
Equity investments, at estimated fair value, pledged as collateral (in dollars)	$ 5,319	$ 7,187
Preferred shares, no par value
Preferred shares, shares authorized	50,000,000	50,000,000
Preferred shares, shares issued	14,950,000	0
Preferred shares, shares outstanding	14,950,000	0
Common shares, no par value
Common shares, shares authorized	500,000,000	500,000,000
Common shares, shares issued	204,824,159	178,437,078
Common shares, shares outstanding	204,824,159	178,437,078

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BORROWINGS

9 Months Ended

Sep. 30, 2013

BORROWINGS

BORROWINGS

NOTE 7. BORROWINGS

Certain information with respect to the Company’s borrowings as of September 30, 2013 is summarized in the following table (dollar amounts in thousands):

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Collateral(1)
CLO 2005-1 senior secured notes	$	203,361	0.75	%	1,304	$	320,391
CLO 2005-2 senior secured notes	346,465		0.65		1,518	501,943
CLO 2006-1 senior secured notes	405,610		0.70		1,790	665,778
CLO 2007-1 senior secured notes	2,075,040		0.82		2,784	2,428,708
CLO 2007-1 mezzanine notes	292,466		3.37		2,784	342,313
CLO 2007-1 subordinated notes(2)	5,828		19.29		2,784	6,821
CLO 2007-A senior secured notes	448,841		1.57		1,476	557,795
CLO 2007-A mezzanine notes	21,632		7.02		1,476	26,882
CLO 2007-A subordinated notes(2)	4,599		47.00		1,476	5,715
CLO 2011-1 senior debt	266,266		1.62		1,780	319,601
CLO 2012-1 senior secured notes	362,618		2.35		4,094	370,187
CLO 2012-1 subordinated notes(2)	21,500		8.50		4,094	21,949
CLO 2013-1 senior secured notes	449,212		2.04		4,306	368,449
Total collateralized loan obligation secured debt	4,903,438					5,936,532
CLO 2007-1 mezzanine notes to affiliates	32,160		9.76		2,784	37,641
CLO 2007-1 subordinated notes to affiliates(2)	130,270		19.29		2,784	152,473
CLO 2007-A mezzanine notes to affiliates	20,994		7.77		1,476	26,090
CLO 2007-A subordinated notes to affiliates(2)	10,497		47.00		1,476	13,045
Total collateralized loan obligation junior secured notes to affiliates	193,921					229,249
Senior secured credit facility	—		2.50		791	—
2015 Asset-based borrowing facility	48,489		2.18		766	219,424
2018 Asset-based borrowing facility(3)	—		—		1,611	—
Total credit facilities	48,489					219,424
8.375% Senior notes	250,784		8.38		10,273	—
7.500% Senior notes	111,467		7.50		10,398	—
Junior subordinated notes	283,517		5.41		8,439	—
Total borrowings	$	5,791,616				$	6,385,205

(1) Collateral for borrowings consists of the estimated fair value of certain corporate loans, securities available-for-sale and equity investments at estimated fair value. Also includes the carrying value of oil and gas assets. For purposes of this table, collateral for CLO senior and junior secured notes are calculated pro rata based on the outstanding borrowings for each respective CLO.

(2) Subordinated notes do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from each respective CLO. Accordingly, weighted average borrowing rates for the subordinated notes were calculated based on year-to-date annualized estimated distributions, if any.

(3) Borrowing rates range from 1.75% to 3.25% plus London interbank offered rate (‘‘LIBOR’’) per annum based on the amount outstanding.

Certain information with respect to the Company’s borrowings as of December 31, 2012 is summarized in the following table (dollar amounts in thousands):

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Collateral(1)
CLO 2005-1 senior secured notes	$	427,317	0.69	%	1,577	$	510,187
CLO 2005-2 senior secured notes	470,516		0.66		1,791	618,000
CLO 2006-1 senior secured notes	601,091		0.69		2,063	846,365
CLO 2007-1 senior secured notes	2,075,040		0.86		3,057	2,298,373
CLO 2007-1 mezzanine notes	203,727		2.81		3,057	225,654
CLO 2007-1 subordinated notes(2)	5,828		26.22		3,057	6,455
CLO 2007-A senior secured notes	601,375		1.50		1,749	698,569
CLO 2007-A mezzanine notes	5,580		7.02		1,749	6,482
CLO 2007-A subordinated notes(2)	4,599		60.24		1,749	5,342
CLO 2011-1 senior debt	343,485		1.67		2,053	421,584
CLO 2012-1 senior secured notes(3)	362,280		2.58		4,367	40,180
CLO 2012-1 subordinated notes(2)(3)	21,500		—		4,367	2,351
Total collateralized loan obligation secured debt	5,122,338					5,679,542
CLO 2007-1 mezzanine notes to affiliates	118,845		6.29		3,057	131,636
CLO 2007-1 subordinated notes to affiliates(2)	130,270		25.89		3,057	144,291
CLO 2007-A mezzanine notes to affiliates	36,945		7.53		1,749	42,916
CLO 2007-A subordinated notes to affiliates(2)	10,497		60.24		1,749	12,194
Total collateralized loan obligation junior secured notes to affiliates	296,557					331,037
Senior secured credit facility	—		2.56		1,064	—
2015 Asset-based borrowing facility	107,789		2.71		1,039	227,415
Total credit facilities	107,789					227,415
7.5% Convertible senior notes	166,028		7.50		1,476	—
8.375% Senior notes	250,735		8.38		10,546	—
7.500% Senior notes	111,443		7.50		10,671	—
Junior subordinated notes	283,517		5.43		8,712	—
Total borrowings	$	6,338,407				$	6,237,994

(1) Collateral for borrowings consists of the estimated fair value of certain corporate loans, securities available-for-sale and equity investments at estimated fair value. Also includes the carrying value of oil and gas assets. For purposes of this table, collateral for CLO senior and junior notes are calculated pro rata based on the outstanding borrowing for each respective CLO.

(2) Subordinated notes do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from each respective CLO. Accordingly, weighted average borrowing rates for the subordinated notes were calculated based on year-to-date annualized estimated distributions, if any.

(3) In addition to the fair value of collateral, CLO 2012-1 held $357.7 million of principal cash as of December 31, 2012 as it was closed on December 21, 2012.

CLO Debt

The indentures governing the Company’s CLO transactions stipulate the reinvestment period during which the collateral manager, which is an affiliate of the Company’s Manager, can generally sell or buy assets at its discretion and can reinvest principal proceeds into new assets. CLO 2007-A, CLO 2005-1 and CLO 2005-2 are no longer in their reinvestment periods. CLO 2006-1 ended its reinvestment period during the third quarter of 2012. As a result, principal proceeds from the assets held in each of these transactions are generally used to amortize the outstanding balance of senior notes outstanding. During the three and nine months ended September 30, 2013, an aggregate $190.8 million and $697.1 million, respectively, of original CLO 2007-A, CLO 2005-1, CLO 2005-2 and CLO 2006-1 senior notes were repaid. During the three and nine months ended September 30, 2012, $114.9 million and $636.7 million, respectively, of original CLO 2007-A, CLO 2005-1 and CLO 2005-2 senior notes were repaid. CLO 2007-1, CLO 2012-1 and CLO 2013-1 will end their reinvestment periods during May 2014, December 2016 and July 2017, respectively. CLO 2011-1 does not have a reinvestment period and all principal proceeds from holdings in CLO 2011-1 are used to amortize the transaction. During the three and nine months ended September 30, 2013, $31.7 million and $77.2 million, respectively, of original CLO 2011-1 senior notes were repaid. During the three and nine months ended September 30, 2012, $10.9 million and $66.1 million, respectively, of original CLO 2011-1 senior notes were repaid.

On September 27, 2013, the Company amended the CLO 2011-1 senior loan agreement (the “CLO 2011-1 Agreement”) to upsize the transaction by $300.0 million, of which CLO 2011-1 is now able to borrow up to an incremental $225.0 million. Under the amended CLO 2011-1 Agreement, CLO 2011-1 matures on August 15, 2020 and borrowings under the CLO 2011-1 Agreement bear interest at a rate of the three-month LIBOR plus 1.35%.

On June 25, 2013, the Company closed CLO 2013-1, a $519.4 million secured financing transaction maturing on July 15, 2025. The Company issued $458.5 million par amount of senior secured notes to unaffiliated investors, of which $442.0 million was floating rate with a weighted-average coupon of three-month LIBOR plus 1.67% and $16.5 million was fixed rate at 3.73%. The investments that are owned by CLO 2013-1 collateralize the CLO 2013-1 debt, and as a result, those investments are not available to the Company, its creditors or shareholders.

On December 21, 2012, the Company closed CLO 2012-1, a $412.4 million secured financing transaction maturing December 16, 2024. The Company issued $367.5 million par amount of senior secured notes to unaffiliated investors, of which $342.5 million was floating rate with a weighted-average coupon of three-month LIBOR plus 2.09% and $25.0 million was fixed rate at 2.39%. The Company also issued $21.5 million of subordinated notes to unaffiliated third party investors. CLO 2012-1’s debt is collateralized by the investments that are owned by CLO 2012-1, and as a result, those investments are not available to the Company, its creditors or shareholders.

During the three and nine months ended September 30, 2012, the Company issued $59.5 million par amount and $119.0 million par amount, respectively, of CLO 2007-1 class D notes for proceeds of $49.4 million and $94.5 million, respectively. In addition, during the nine months ended September 30, 2012, the Company issued $11.3 million par amount of CLO 2007-A class C notes for proceeds of $10.6 million.

Credit Facilities

Senior Secured Credit Facility

On November 30, 2012, the Company entered into a credit agreement for a three-year $150.0 million revolving credit facility, maturing on November 30, 2015 (the “2015 Facility”). The Company may obtain additional commitments under the 2015 Facility so long as the aggregate amount of commitments at any time does not exceed $350.0 million. The Company has the right to prepay loans under the 2015 Facility in whole or in part at any time. In connection with entering into the 2015 Facility, the Company terminated the commitments under its existing asset-based revolving credit facility. Loans under the 2015 Facility bear interest at a rate equal to, at the Company’s option, LIBOR plus 2.25% per annum, or an alternate base rate plus 1.25% per annum. The 2015 Facility contains customary covenants, including ones that require the Company to satisfy a net worth financial test and maintain certain ratios relating to leverage and consolidated total assets. In addition, the 2015 Facility contains customary negative covenants applicable to the Company. As of September 30, 2013 and December 31, 2012, the Company had no borrowings outstanding under the 2015 Facility.

Asset-Based Borrowing Facilities

On May 15, 2013, the Company’s five-year nonrecourse, asset-based revolving credit facility (the “2015 Natural Resources Facility”), maturing on November 5, 2015, was adjusted and reduced to $100.9 million, that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified oil and gas assets. The borrowing base is subject to certain caps and concentration limits customary for financings of this type. The Company has the right to prepay loans under the 2015 Natural Resources Facility in whole or in part at any time. Loans under the 2015 Natural Resources Facility bear interest at a rate equal to LIBOR plus a tiered applicable margin ranging from 1.75% to 2.75% per annum. The 2015 Natural Resources Facility contains customary covenants applicable to the Company. As of September 30, 2013 and December 31, 2012, the Company had $48.5 million and $107.8 million, respectively, of borrowings outstanding under the 2015 Natural Resources Facility.

On February 27, 2013, the Company entered into a separate credit agreement for a five-year $6.0 million non-recourse, asset-based revolving credit facility, maturing on February 27, 2018 (the “2018 Natural Resources Facility”), that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified oil and gas assets. On August 1, 2013, the 2018 Natural Resources Facility was adjusted and increased to $20.0 million. The Company has the right to prepay loans under the 2018 Natural Resources Facility in whole or in part at any time. Loans under the 2018 Natural Resources Facility bear interest at a rate equal to LIBOR plus a tiered applicable margin ranging from 1.75% to 3.25% per annum. The 2018 Natural Resources Facility contains customary covenants applicable to the Company. As of September 30, 2013, the Company had no borrowings outstanding under the 2018 Natural Resources Facility.

As of September 30, 2013 and December 31, 2012, the Company believes it was in compliance with the covenant requirements for its credit facilities.

Convertible Debt

7.5% Convertible Senior Notes

On January 18, 2013, in accordance with the indenture relating to the Company’s $172.5 million 7.5% convertible senior notes due January 15, 2017 (“7.5% Notes”), the Company issued a conversion rights termination notice (“Termination Notice”) to holders of the 7.5% Notes whereby it terminated the right to convert the 7.5% Notes to common shares. The conversion rate as of January 18, 2013 was equal to 141.8256 common shares for each $1,000 principal amount of 7.5% Notes, plus an additional 9.2324 common shares per $1,000 principal amount to account for the make-whole premium. Holders of $172.5 million 7.5% Notes submitted their notes for conversion for which the Company satisfied by physical settlement with 26.1 million common shares.

In accordance with accounting for convertible debt instruments that may be settled in cash upon conversion, the Company had separately accounted for the liability and equity components to reflect the nonconvertible debt borrowing rate. The Company determined that the equity component of the 7.5% Notes totaled $10.0 million and was included in paid-in-capital on the Company’s consolidated balance sheet as of December 31, 2012. The remaining liability component of $166.0 million, included within convertible senior notes on the Company’s consolidated balance sheets as of December 31, 2012, was comprised of the principal $172.5 million less the unamortized debt discount of $6.5 million as of December 31, 2012. The total debt discount amortization recognized for the three and nine months ended September 30, 2012 was $0.4 million and $1.0 million, respectively, at the effective interest rate of 8.6%. For the three and nine months ended September 30, 2013, the total interest expense recognized on the 7.5% Notes was less than $0.1 million and $0.5 million, respectively. For the three and nine months ended September 30, 2012, the total interest expense recognized on the 7.5% Notes was $3.2 million and $9.7 million, respectively.

7.0% Convertible Senior Notes

During the three months ended March 31, 2012, the Company repurchased $23.1 million par amount of its 7.0% convertible senior notes due July 15, 2012 (the “7.0% Notes”). These transactions resulted in the Company recording a loss of $0.4 million and a $0.2 million write-off of unamortized debt issuance costs. On July 13, 2012, the Company repaid in full its $112.0 million of outstanding 7.0% Notes, which matured on July 15, 2012.

Senior Notes

On March 20, 2012, the Company issued $115.0 million par amount of 7.500% senior notes due March 20, 2042 (“7.500% Senior Notes”), resulting in net proceeds of $111.4 million. Interest on the 7.500% Senior Notes is payable quarterly in arrears on June 20, September 20, December 20 and March 20 of each year.

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Condensed Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Condensed Consolidated Statements of Comprehensive Income
Net income	$ 39,886	$ 111,964	$ 224,354	$ 271,217
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale	3,137	(24,572)	2,322	(34,399)
Unrealized gains on cash flow hedges	6,813	2,767	38,211	1,580
Total other comprehensive income (loss)	9,950	(21,805)	40,533	(32,819)
Comprehensive income	$ 49,836	$ 90,159	$ 264,887	$ 238,398

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BORROWINGS (Details 4) (USD $) Share data in Millions, unless otherwise specified	3 Months Ended	9 Months Ended			0 Months Ended	3 Months Ended	9 Months Ended			3 Months Ended	0 Months Ended	3 Months Ended
	Mar. 31, 2013	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Jan. 18, 2013 7.5% Convertible Senior Notes	Sep. 30, 2012 7.5% Convertible Senior Notes	Sep. 30, 2013 7.5% Convertible Senior Notes	Sep. 30, 2012 7.5% Convertible Senior Notes	Dec. 31, 2012 7.5% Convertible Senior Notes	Sep. 30, 2013 7.5% Convertible Senior Notes Maximum	Jul. 13, 2012 7.0% convertible senior notes	Mar. 31, 2012 7.0% convertible senior notes	Sep. 30, 2013 7.0% convertible senior notes	Sep. 30, 2012 7.0% convertible senior notes
Details of Company's borrowings
Interest rate (as a percent)					7.50%								7.00%	7.00%
Convertible senior notes issued, principal amount				$ 166,028,000	$ 172,500,000				$ 166,028,000
Conversion rate of common stock shares per $1,000 principal amount (in shares per USD)					0.1418256
Principal amount used for debt instrument conversion ratio					1,000
Conversion rate of additional common shares issued upon conversion per $1,000 principal amount to account for the make-whole premium (in shares per USD)					0.0092324
Amount of debt that had been tendered for conversion	172,500,000	186,254,000			172,500,000
Number of common shares of the entity issued in exchange of convertible notes (in shares)	26.1				26.1
Carrying amount of equity component included in paid-in-capital									10,000,000
Total borrowings		5,791,616,000		6,338,407,000					166,000,000
Convertible debt principal amount									172,500,000
Debt discount, unamortized									6,500,000
Debt discount, amortized						400,000		1,000,000
Effective interest rate to amortize debt discount (as a percent)						8.60%		8.60%
Interest expense, recognized						3,200,000	500,000	9,700,000		100,000
Principal amount of debt extinguishment											112,000,000	23,100,000
Loss on repurchase of convertible notes												400,000
Write-off of unamortized debt issuance costs		$ 6,014,000	$ 1,381,000									$ 200,000

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Assets
Cash and cash equivalents	$ 221,986	$ 237,606
Restricted cash and cash equivalents	509,688	896,396
Securities	519,675	533,520
Corporate loans, net (includes $156,595 and $35,879 measured at estimated fair value and $312,312 and $128,289 loans held for sale as of September 30, 2013 and December 31, 2012, respectively)	6,153,072	5,947,857
Equity investments, at estimated fair value ($5,319 and $7,187 pledged as collateral as of September 30, 2013 and December 31, 2012, respectively)	191,153	161,621
Oil and gas properties, net	372,034	289,929
Derivative assets	35,348	23,207
Interest and principal receivable	38,586	46,960
Other assets	430,449	221,783
Total assets	8,471,991	8,358,879
Liabilities
Credit facilities	48,489	107,789
Convertible senior notes		166,028
Senior notes	362,251	362,178
Junior subordinated notes	283,517	283,517
Accounts payable, accrued expenses and other liabilities	74,737	25,931
Related party payable	3,847	10,998
Derivative liabilities	86,108	117,270
Total liabilities	5,976,939	6,519,757
Shareholders' equity
Preferred shares, no par value, 50,000,000 shares authorized and 14,950,000 and zero issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	0	0
Common shares, no par value, 500,000,000 shares authorized, and 204,824,159 and 178,437,078 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	0	0
Paid-in-capital	3,313,400	2,762,584
Accumulated other comprehensive loss	(29,693)	(70,226)
Accumulated deficit	(788,655)	(853,236)
Total shareholders' equity	2,495,052	1,839,122
Total liabilities and shareholders' equity	8,471,991	8,358,879
Affiliates
Liabilities
Collateralized loan obligation junior secured notes to affiliates	193,921	296,557
Accrued interest payable	4,134	6,632
Nonaffiliates
Liabilities
Collateralized loan obligation secured notes	4,903,438	5,122,338
Accrued interest payable	$ 16,497	$ 20,519

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 10) (Corporate Loans, USD $) In Millions, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Concentrated risks
Number of issuers with whom a specified percentage of amortized cost of corporate loans is concentrated	20	20
Number of issuers with the largest concentration of corporate loans	3	3
Percent to Total Corporate Loans
Concentrated risks
Concentration risk of total amortized cost basis (as a percent)	47.00%	46.00%
Percent to Total Corporate Loans | Texas Competitive Electric Holdings Company LLC, Modular Space Corporation, and U.S. Foods Inc.
Concentrated risks
Concentration risk of total amortized cost basis (as a percent)	15.00%	16.00%
Amortized cost of corporate loans concentrated in major issuers (in dollars)	$ 935.8	$ 1,000.0

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SEGMENT REPORTING (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Reconciliation of operating profit loss from segment to consolidated
Total revenues	$ 128,702	$ 143,334	$ 406,396	$ 421,818
Total investment costs and expenses	77,877	70,900	224,119	245,807
Total other income (loss)	6,226	73,043	117,681	168,424
Total other expenses	17,147	33,196	75,170	76,766
Income tax expense (benefit)	18	317	434	(3,548)
Net income	39,886	111,964	224,354	271,217
Incentive fees	0	17,800	22,700	31,500
Net loss on restructuring and extinguishment of debt			20,269	445
Total assets	8,471,991		8,471,991		8,358,879
Reportable segments | Credit
Reconciliation of operating profit loss from segment to consolidated
Total revenues	96,243	121,808	320,769	377,517
Total investment costs and expenses	55,253	51,681	162,097	204,443
Total other income (loss)	6,969	78,258	132,853	170,505
Total other expenses	14,155	11,302	43,151	35,852
Income tax expense (benefit)	9	316	420	(3,549)
Net income	33,795	136,767	247,954	311,276
Total assets	7,823,309		7,823,309		7,904,116
Reportable segments | Natural Resources
Reconciliation of operating profit loss from segment to consolidated
Total revenues	32,446	21,487	84,118	44,262
Total investment costs and expenses	22,386	19,120	61,355	41,179
Total other income (loss)	(3,437)	(5,215)	(918)	(1,636)
Total other expenses	1,269	2,025	3,698	4,638
Net income	5,354	(4,873)	18,147	(3,191)
Total assets	483,546		483,546		399,225
Reportable segments | Other
Reconciliation of operating profit loss from segment to consolidated
Total revenues	13	39	1,509	39
Total investment costs and expenses	238	99	667	185
Total other income (loss)	2,694		6,015
Total other expenses	116	49	484	92
Income tax expense (benefit)	9	1	14	1
Net income	2,344	(110)	6,359	(239)
Total assets	163,940		163,940		53,742
Reconciling Items
Reconciliation of operating profit loss from segment to consolidated
Total other income (loss)			(20,269)	(445)
Total other expenses	1,607	19,820	27,837	36,184
Net income	(1,607)	(19,820)	(48,106)	(36,629)
Total assets	$ 1,196		$ 1,196		$ 1,796

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 3) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Amortized Cost | Corporate loans held for sale
Assets and liabilities measured at fair value on a non- recurring basis
Loans held for sale	$ 139,200,000	$ 54,400,000
Non-recurring basis | Significant Other Observable Inputs (Level 2)
Assets and liabilities measured at fair value on a non- recurring basis
Asset, fair value	167,950,000	49,521,000
Non-recurring basis | Significant Unobservable Inputs (Level 3)
Assets and liabilities measured at fair value on a non- recurring basis
Asset, fair value	5,120,000	24,347,000
Non-recurring basis | Estimated Fair Value
Assets and liabilities measured at fair value on a non- recurring basis
Asset, fair value	$ 173,070,000	$ 73,868,000

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DERIVATIVE INSTRUMENTS (Tables)

9 Months Ended

Sep. 30, 2013

Derivative Instruments

Schedule of aggregate notional amount and estimated net fair value of the derivative instruments

The table below summarizes the aggregate notional amount and estimated net fair value of the derivative instruments as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013						As of December 31, 2012
	Notional			Estimated Fair Value			Notional			Estimated Fair Value
Cash Flow Hedges:
Interest rate swaps	$	485,833		$	(52,332	)	$	503,833		$	(90,618	)
Free-Standing Derivatives:
Commodity swaps	—			4,330			—			7,056
Credit default swaps—protection sold	—			—			—			19
Credit default swaps—protection purchased	(109,953		)	(1,665		)	(47,321		)	(1,140		)
Foreign exchange forward contracts	(293,457		)	(23,174		)	(338,313		)	(20,975		)
Foreign exchange options	130,207			7,931			130,207			8,277
Common stock warrants	—			4,541			—			3,318
Total rate of return swaps	—			729			—			—
Options	—			8,880			—			—
Total				$	(50,760	)				$	(94,063	)

Schedule of net gains recognized in accumulated other comprehensive loss related to derivatives in cash flow hedging relationships

The following table presents the net gains recognized in accumulated other comprehensive loss related to derivatives in cash flow hedging relationships for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three monthsended September 30, 2013		For the three monthsendedSeptember 30, 2012		For the nine monthsended September 30, 2013		For the ninemonthsendedSeptember 30, 2012
Net gains recognized in accumulated other comprehensive loss on cash flow hedges	$	6,813	$	2,767	$	38,211	$	1,580

Schedule of open positions of derivative contracts on expected annual production volumes

The following table summarizes open positions as of September 30, 2013, and represents, as of such date, derivatives in place through December 31, 2016, on expected annual production volumes:

	2013		2014		2015		2016
Natural gas positions:
Fixed price swaps:
Hedged volume (MMMBtu)	1,691		5,821		4,277		1,805
Average price ($/MMBtu)	$	3.60	$	3.86	$	4.07	$	4.17
Natural gas liquid positions:
Fixed price swaps:
Hedged volume (MBbls)	48		145		—		—
Average price ($/Bbl)	$	32.05	$	27.89	$	—	$	—
Oil positions:
Fixed price swaps:
Hedged volume (MBbls)	114		626		253		—
Average price ($/Bbl)	$	101.58	$	95.05	$	89.18	$	—

Schedule of effect on income from free-standing derivatives by derivative instrument type

The amounts recorded in net realized and unrealized gain (loss) on derivatives and foreign exchange on the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	Three months ended September 30, 2013									Three months ended September 30, 2012
	Realized gains (losses)(1)			Unrealized gains (losses)			Total			Realized gains (losses)(1)			Unrealized gains (losses)			Total
Commodity swaps	$	(78	)	$	(3,645	)	$	(3,723	)	$	931		$	(6,738	)	$	(5,807	)
Credit default swaps	(365		)	(967		)	(1,332		)	(1,167		)	(4,385		)	(5,552		)
Foreign exchange forward contracts and options(2)	502			1,444			1,946			(1,361		)	3,884			2,523
Common stock warrants	—			(1,219		)	(1,219		)	—			734			734
Total rate of return swaps	447			729			1,176			—			—			—
Options	—			90			90			—			—			—
Net realized and unrealized gains (losses)	$	506		$	(3,568	)	$	(3,062	)	$	(1,597	)	$	(6,505	)	$	(8,102	)

(1) Includes related income and expense on the derivatives.

(2) Net of foreign exchange remeasurement gain or loss on foreign denominated assets.

	Nine months ended September 30, 2013									Nine months ended September 30, 2012
	Realized gains (losses)(1)			Unrealized gains (losses)			Total			Realized gains (losses)(1)			Unrealized gains (losses)			Total
Commodity swaps	$	1,008		$	(2,725	)	$	(1,717	)	$	3,590		$	(2,917	)	$	673
Credit default swaps	(3,526		)	552			(2,974		)	(5,764		)	2,497			(3,267		)
Foreign exchange forward contracts and options(2)	2,770			(4,929		)	(2,159		)	(396		)	(971		)	(1,367		)
Common stock warrants	—			540			540			—			1,237			1,237
Total rate of return swaps	447			729			1,176			141			—			141
Options	(91		)	213			122			—			—			—
Net realized and unrealized gains (losses)	$	608		$	(5,620	)	$	(5,012	)	$	(2,429	)	$	(154	)	$	(2,583	)

(1) Includes related income and expense on the derivatives.

(2) Net of foreign exchange remeasurement gain or loss on foreign denominated assets.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2013

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from management’s estimates.

The Company uses historical experience and various other assumptions and information that are believed to be reasonable under the circumstances in developing its estimates and judgments. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. While the Company believes that the estimates and assumptions used in the preparation of the condensed consolidated financial statements are appropriate, actual results could differ from those estimates.

Estimates of oil, natural gas and natural gas liquid (“NGL”) reserves and their values, future production rates and future costs and expenses are inherently uncertain, including many factors beyond the Company’s control. Reservoir engineering is a subjective process of estimating underground accumulations of oil, natural gas and NGL that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions and the judgments of the individuals preparing the estimates. In addition, reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of oil, natural gas and NGL eventually recovered, and could materially affect the Company’s future depreciation, depletion and amortization expense (“DD&A”), its asset retirement obligations or impairment considerations.

Consolidation

Consolidation

KKR Financial CLO 2005-1, Ltd. (“CLO 2005-1”), KKR Financial CLO 2005-2, Ltd. (“CLO 2005-2”), KKR Financial CLO 2006-1, Ltd. (“CLO 2006-1”), KKR Financial CLO 2007-1, Ltd. (“CLO 2007-1”), KKR Financial CLO 2007-A, Ltd. (“CLO 2007-A”), KKR Financial CLO 2011-1, Ltd. (“CLO 2011-1”), KKR Financial CLO 2012-1, Ltd. (“CLO 2012-1”), and KKR Financial CLO 2013-1, Ltd. (“CLO 2013-1”) (collectively the “Cash Flow CLOs”) are entities established to complete secured financing transactions. These entities are VIEs which the Company consolidates as the Company has determined it has the power to direct the activities that most significantly impact these entities’ economic performance and the Company has both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities. In CLO transactions, subordinated notes have the first risk of loss and conversely, the residual value upside of the transactions.

The Company finances the majority of its corporate debt investments through its CLOs. As of September 30, 2013, the Company’s eight CLOs held $6.5 billion par amount, or $6.2 billion estimated fair value, of corporate debt investments. As of December 31, 2012, the Company had seven CLOs that held $6.3 billion par amount, or $6.0 billion estimated fair value, of corporate debt investments. The assets in each CLO can be used only to settle the debt of the related CLO. As of September 30, 2013, the aggregate CLO debt totaled $4.9 billion of secured debt outstanding held by unaffiliated third parties and $193.9 million of junior secured notes outstanding held by an affiliate of the Manager.

The Company consolidates all non-VIEs in which it holds a greater than 50 percent voting interest.

In addition, the Company has non-controlling interests in joint ventures and partnerships that do not qualify as VIEs and do not meet the control requirements for consolidation as defined by GAAP.

All inter-company balances and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:

Level 1:  Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets generally included in this category are equity securities listed in active markets.

Level 2:  Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value and certain financial instruments classified as derivatives.

Level 3:  Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value, residential mortgage-backed securities (“RMBS”), certain interests in joint ventures and partnerships and certain financial instruments classified as derivatives.

A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which the Company recognizes at the end of the reporting period.

Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that the Company and others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, the Company does not require that fair value always be a predetermined point in the bid-ask range. The Company’s policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets the Company’s best estimate of fair value.

Depending on the relative liquidity in the markets for certain assets, the Company may transfer assets to Level 3 if it determines that observable quoted prices, obtained directly or indirectly, are not available. The valuation techniques used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.

Securities and Corporate Loans, at Estimated Fair Value:  Securities and corporate loans, at estimated fair value are initially valued at transaction price and are subsequently valued using market data for similar instruments (e.g., recent transactions or broker quotes), comparisons to benchmark derivative indices or valuation models. Valuation models are based on yield analysis techniques, where the key inputs are based on relative value analyses, which incorporate similar instruments from similar issuers. In addition, an illiquidity discount is applied where appropriate.

Equity Investments, at Estimated Fair Value:  Equity investments, at estimated fair value, are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on market and income (discounted cash flow) approaches, in which various internal and external factors are considered. Factors include key financial inputs and recent public and private transactions for comparable investments. Key inputs used for the discounted cash flow approach include the weighted average cost of capital and assumed inputs used to calculate terminal values, such as earnings before interest, taxes, depreciation and amortization (“EBIDTA”) exit multiples. The fair value recorded for a particular investment will generally be within the range suggested by the two approaches. Upon completion of the valuations conducted, an illiquidity discount is applied where appropriate.

Interests in Joint Ventures and Partnerships:  Interests in joint ventures and partnerships include certain equity investments related to the oil and gas and commercial real estate sectors. Interests in joint ventures and partnerships are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on an income (discounted cash flow) approach, in which various internal and external factors are considered and key inputs include the weighted average cost of capital. In addition, an illiquidity discount is applied where appropriate.

Over-the-counter (“OTC”) Derivative Contracts:  OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit standing of reference entities, and equity prices. OTC derivatives are initially valued using quoted market prices, if available, or models using a series of techniques, including closed-form analytic formulae, such as the Black-Scholes option-pricing model, and/or simulation models in the absence of quoted market prices. Many pricing models employ methodologies that have pricing inputs observed from actively quoted markets, as is the case for generic interest rate swap and option contracts.

Residential Mortgage-Backed Securities, at Estimated Fair Value:  RMBS are initially valued at transaction price and are subsequently valued using a third party valuation servicer. The most significant inputs to the valuation of these instruments are default and loss expectations and constant prepayment rates.

Key unobservable inputs that have a significant impact on the Company’s Level 3 valuations as described above are included in Note 13 to these condensed consolidated financial statements. The Company utilizes several unobservable pricing inputs and assumptions in determining the fair value of its Level 3 investments. These unobservable pricing inputs and assumptions may differ by asset and in the application of the Company’s valuation methodologies. The reported fair value estimates could vary materially if the Company had chosen to incorporate different unobservable pricing inputs and other assumptions or, for applicable investments, if the Company only used either the discounted cash flow methodology or the market comparables methodology instead of assigning a weighting to both methodologies.

Valuation Process

The valuation process involved in Level 3 measurements for assets and liabilities is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The Company utilizes a valuation committee, whose members consist of the Company’s Chief Executive Officer, Chief Financial Officer, General Counsel and certain other employees of the Manager. The valuation committee is responsible for coordinating and implementing the Company’s quarterly valuation process. For assets classified as Level 3, the investment professionals are responsible for documenting preliminary valuations based on various factors including their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and model projections discussed above. The Company engages an independent valuation firm to opine on its internal valuation assessments for certain holdings over a specific dollar threshold. All valuations are approved by the valuation committee.

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash held in banks and highly liquid investments with original maturities of three months or less. Interest income earned on cash and cash equivalents is recorded in other within total revenues on the condensed consolidated statements of operations.

Restricted Cash and Cash Equivalents

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents represent amounts that are held by third parties under certain of the Company’s financing and derivative transactions. Interest income earned on restricted cash and cash equivalents is recorded in other within total revenues on the condensed consolidated statements of operations.

On the condensed consolidated statement of cash flows, net additions or reductions to restricted cash and cash equivalents are classified as an investing activity as restricted cash and cash equivalents reflect the receipts from collections or sales of investments, as well as payments made to acquire investments held by third parties.

Securities Available-for-Sale

Securities

Securities Available-for-Sale

The Company classifies its investments in securities as available-for-sale as the Company may sell them prior to maturity and does not hold them principally for the purpose of selling them in the near term. These investments are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive loss. Estimated fair values are based on quoted market prices, when available, on estimates provided by independent pricing sources or dealers who make markets in such securities, or internal valuation models when external sources of fair value are not available. Upon the sale of a security, the realized net gain or loss is computed on a weighted average cost basis. Purchases and sales of securities are recorded on the trade date.

The Company monitors its available-for-sale securities portfolio for impairments. A loss is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. The Company considers many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost and the severity of the decline, the amount of the unrealized loss, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. In addition, for debt securities, the Company considers its intent to sell the debt security, the Company’s estimation of whether or not it expects to recover the debt security’s entire amortized cost if it intends to hold the debt security, and whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery. For equity securities, the Company also considers its intent and ability to hold the equity security for a period of time sufficient for a recovery in value.

The amount of the loss that is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary is dependent on certain factors. If the security is an equity security or if the security is a debt security that the Company intends to sell or estimates that it is more likely than not that the Company will be required to sell before recovery of its amortized cost, then the impairment amount recognized in earnings is the entire difference between the estimated fair value of the security and its amortized cost. For debt securities that the Company does not intend to sell or estimates that it is not more likely than not to be required to sell before recovery, the impairment is separated into the estimated amount relating to credit loss and the estimated amount relating to all other factors. Only the estimated credit loss amount is recognized in earnings, with the remainder of the loss amount recognized in accumulated other comprehensive loss.

Unamortized premiums and unaccreted discounts on securities available-for-sale are recognized in interest income over the contractual life, adjusted for actual prepayments, of the securities using the effective interest method.

Other Securities, at Estimated Fair Value

Other Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain securities for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these securities. Other securities, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Residential Mortgage-Backed Securities, at Estimated Fair Value

Residential Mortgage-Backed Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for its residential mortgage investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of its residential mortgage investments. RMBS, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Equity Investments, at Estimated Fair Value

Equity Investments, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain marketable equity securities and private equity investments. The Company elects the fair value option of accounting for private equity investments received through restructuring debt transactions or issued by an entity in which the Company may have significant influence. The Company elected the fair value option for certain equity investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these equity investments. Equity investments, at fair value, are managed based on overall value and potential returns. These equity investments carried at estimated fair value are presented separately on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Interests in Joint Ventures and Partnerships

Interests in Joint Ventures and Partnerships

The Company has elected the fair value option of accounting for certain non-controlling interests in joint ventures and partnerships, for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these interests. These interests in joint ventures and partnerships are presented within other assets on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statements of operations.

Securities Sold, Not Yet Purchased

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased consist of equity and debt securities that the Company has sold short. In order to facilitate a short sale, the Company borrows the securities from another party and delivers the securities to the buyer. The Company will be required to “cover” its short sale in the future through the purchase of the security in the market at the prevailing market price and deliver it to the counterparty from which it borrowed. The Company is exposed to a loss to the extent that the security price increases during the time from when the Company borrowed the security to when the Company purchases it in the market to cover the short sale. Securities sold, not yet purchased are presented within accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets with gains and losses reported in net realized and unrealized gains on investments on the condensed consolidated statement of operations.

Corporate Loans

Corporate Loans, Net

Corporate Loans

Corporate loans are generally held for investment and the Company initially records loans at their purchase prices. The Company subsequently accounts for loans based on their outstanding principal plus or minus unaccreted purchase discounts and unamortized purchase premiums. Corporate loans that the Company transfers to held for sale are transferred at the lower of cost or estimated fair value.

Interest income on loans includes interest at stated coupon rates adjusted for accretion of purchase discounts and the amortization of purchase premiums. Unamortized premiums and unaccreted discounts are recognized in interest income over the contractual life, adjusted for actual prepayments, of the loans using the effective interest method.

Other than loans which are measured at fair value, loans acquired with deteriorated credit quality are recorded at initial cost and interest income is recognized as the difference between the Company’s estimate of all cash flows that it will receive from the loan in excess of its initial investment on a level-yield basis over the life of the loan (accretable yield) using the effective interest method.

A loan is typically placed on non-accrual status at such time as: (i) management believes that scheduled debt service payments may not be paid when contractually due; (ii) the loan becomes 90 days delinquent; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the collateral securing the loan decreases below the Company’s carrying value of such loan. As such, loans placed on non-accrual status may or may not be contractually past due at the time of such determination. While on non-accrual status, previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using the cost-recovery method, cash-basis method or some combination of the two methods. A loan is placed back on accrual status when the ultimate collectability of the principal and interest is not in doubt.

The Company may modify corporate loans in transactions where the borrower is experiencing financial difficulty and a concession is granted to the borrower as part of the modification. These concessions may include one or a combination of the following: a reduction of the stated interest rate; payment extensions; forgiveness of principal; or an exchange of assets. Such modifications typically qualify as troubled debt restructurings (“TDRs”). In order to determine whether the borrower is experiencing financial difficulty, an evaluation is performed including the following considerations: whether the borrower is or will be in payment default on any of his or her debt in the foreseeable future without the modification; whether there is a potential for a bankruptcy filing; whether there is a going-concern issue; or whether the borrower is unable to secure financing elsewhere. The Company may also identify receivables that are newly considered impaired and discloses the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired.

Loans whose terms have been modified in a TDR are considered impaired, unless accounted for at fair value or the lower of cost or estimated fair value, and are typically placed on non-accrual status, but can be moved to accrual status when, among other criteria, payment in full of all amounts due under the restructured terms is expected and the borrower has demonstrated a sustained period of repayment performance, typically six months.

TDRs are separately identified for impairment disclosures and are measured at either the fair market value or the present value of estimated future cash flows using the respective loan’s effective rate at inception. Impairments associated with TDRs are included within the allocated component of the Company’s allowance for loan losses.

In addition, the Company may also modify corporate loans which usually involve changes in existing interest rates combined with changes of existing maturities to prevailing market rates/maturities for similar instruments at the time of modification. Such modifications typically do not meet the definition of a TDR since the respective borrowers are neither experiencing financial difficulty nor are seeking a concession as part of the modification.

The corporate loans the Company invests in are generally deemed in default upon the non-payment of a single interest payment or as a result of the violation of a covenant in the respective loan agreement. The Company charges-off a portion or all of its amortized cost basis in a corporate loan when it determines that it is uncollectible due to either: (i) the estimation based on a recovery value analysis of a defaulted loan that less than the amortized cost amount will be recovered through the agreed upon restructuring of the loan or as a result of a bankruptcy process of the issuer of the loan; or (ii) the determination by the Company to transfer a loan to held for sale with the loan having an estimated market value below the amortized cost basis of the loan.

Allowance for Loan Losses

Allowance for Loan Losses

The Company’s corporate loan portfolio is comprised of a single portfolio segment which includes one class of financing receivables, that is, high yield loans that are typically purchased via assignment or participation in either the primary or secondary market and are held primarily for investment. High yield loans are generally characterized as having below investment grade ratings or being unrated.

The Company’s allowance for loan losses represents its estimate of probable credit losses inherent in its corporate loan portfolio held for investment as of the balance sheet date. Estimating the Company’s allowance for loan losses involves a high degree of management judgment and is based upon a comprehensive review of the Company’s loan portfolio that is performed on a quarterly basis. The Company’s allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses pertains to specific loans that the Company has determined are impaired. The Company determines a loan is impaired when management estimates that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis the Company performs a comprehensive review of its entire loan portfolio and identifies certain loans that it has determined are impaired. Once a loan is identified as being impaired, the Company places the loan on non-accrual status, unless the loan is already on non-accrual status, and records an allowance that reflects management’s best estimate of the loss that the Company expects to recognize from the loan. The expected loss is estimated as being the difference between the Company’s current cost basis of the loan, including accrued interest receivable, and the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the loan’s observable estimated fair value may be used. The Company also estimates the probable credit losses inherent in its unfunded loan commitments as of the balance sheet date. Any credit loss reserve for unfunded loan commitments is recorded in accounts payable, accrued expenses and other liabilities on the Company’s condensed consolidated balance sheets.

The unallocated component of the Company’s allowance for loan losses represents its estimate of probable losses inherent in the loan portfolio as of the balance sheet date where the specific loan that the loan loss relates to is indeterminable. The Company estimates the unallocated component of the allowance for loan losses through a comprehensive review of its loan portfolio and identifies certain loans that demonstrate possible indicators of impairment, including internally assigned credit quality indicators. This assessment excludes all loans that are determined to be impaired and as a result, an allocated reserve has been recorded as described in the preceding paragraph. Such indicators include the current and/or forecasted financial performance and liquidity profile of the issuer, specific industry or economic conditions that may impact the issuer, and the observable trading price of the loan if available. All loans are first categorized based on their assigned risk grade and further stratified based on the seniority of the loan in the issuer’s capital structure. The seniority classifications assigned to loans are senior secured, second lien and subordinate. Senior secured consists of loans that are the most senior debt in an issuer’s capital structure and therefore have a lower estimated loss severity than other debt that is subordinate to the senior secured loan. Senior secured loans often have a first lien on some or all of the issuer’s assets. Second lien consists of loans that are secured by a second lien interest on some or all of the issuer’s assets; however, the loan is subordinate to the first lien debt in the issuer’s capital structure. Subordinate consists of loans that are generally unsecured and subordinate to other debt in the issuer’s capital structure.

There are three internally assigned risk grades that are applied to loans that have not been identified as being impaired: high, moderate and low. High risk means that there is evidence of possible loss due to the financial or operating performance and liquidity of the issuer, industry or economic concerns specific to the issuer, or other factors that indicate that the breach of a covenant contained in the related loan agreement is possible. Moderate risk means that while there is not observable evidence of possible loss, there are issuer and/or industry specific trends that indicate a loss may have occurred. Low risk means that while there is no identified evidence of loss, there is the risk of loss inherent in the loan that has not been identified. All loans held for investment, with the exception of loans that have been identified as impaired, are assigned a risk grade of high, moderate or low.

The Company applies a range of default and loss severity estimates in order to estimate a range of loss outcomes upon which to base its estimate of probable losses that results in the determination of the unallocated component of the Company’s allowance for loan losses.

Corporate Loans Held for Sale

Corporate Loans Held for Sale

From time to time the Company makes the determination to transfer certain of its corporate loans from held for investment to held for sale. The decision to transfer a loan to held for sale is generally as a result of the Company determining that the respective loan’s credit quality in relation to the loan’s expected risk-adjusted return no longer meets the Company’s investment objective and/or the Company deciding to reduce or eliminate its exposure to a particular loan for risk management purposes. Corporate loans held for sale are stated at lower of cost or estimated fair value and are assessed on an individual basis. Prior to transferring a loan to held for sale, any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to the yield by the interest method. The loan is transferred from held for investment to held for sale at the lower of its cost or estimated fair value and is carried at the lower of its cost or estimated fair value thereafter. Subsequent to transfer and while the loan is held for sale, recognition as an adjustment to yield by the interest method is discontinued for any difference between the carrying amount of the loan and its outstanding principal balance.

From time to time the Company also makes the determination to transfer certain of its corporate loans from held for sale back to held for investment. The decision to transfer a loan back to held for investment is generally as a result of the circumstances that led to the initial transfer to held for sale no longer being present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy. The loan is transferred from held for sale back to held for investment at the lower of its cost or estimated fair value, whereby a new cost basis is established based on this amount.

Interest income on corporate loans held for sale is recognized through accrual of the stated coupon rate for the loans, unless the loans are placed on non-accrual status, at which point previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using either the cost-recovery method or on a cash-basis.

Corporate Loans, at Estimated Fair Value

Corporate Loans, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain corporate loans for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these corporate loans. Corporate loans carried at estimated fair value are included within corporate loans, net on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains on investments in the condensed consolidated statement of operations.

Oil and Natural Gas Properties

Oil and Natural Gas Properties

Oil and natural gas producing activities are accounted for under the successful efforts method of accounting. Under this method, exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found. Lease acquisition costs are capitalized when incurred. Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs and costs of certain nonproducing leasehold costs are expensed as incurred.

Expenditures for repairs and maintenance are charged to expense as incurred.

The capitalized costs of producing oil and natural gas properties are depleted on a field-by-field basis using the units-of production method based on the ratio of current production to estimated total net proved oil, natural gas and NGL reserves. Proved developed reserves are used in computing depletion rates for drilling and development costs and total proved reserves are used for depletion rates of leasehold costs.

Estimated dismantlement and abandonment costs for oil and natural gas properties, net of salvage value, are capitalized at their estimated net present value and amortized on a unit-of-production basis over the remaining life of the related proved developed reserves.

Oil And Gas Revenue Recognition

Oil and Gas Revenue Recognition

Oil, natural gas and NGL revenues are recognized when production is sold to a purchaser at fixed or determinable prices, when delivery has occurred and title has transferred and collectability of the revenue is reasonably assured. The Company follows the sales method of accounting for natural gas revenues. Under this method of accounting, revenues are recognized based on volumes sold, which may differ from the volume to which we are entitled based on the Company’s working interest. An imbalance is recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the under-produced owners to recoup its entitled share through future production. Under the sales method, no receivables are recorded when the Company has taken less than its share of production and no payables are recorded when the Company has taken more than its share of production.

Long-Lived Assets

Long-Lived Assets

The Company evaluates its proved oil and natural gas properties and related equipment and facilities for impairment on a field-by-field basis, whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, future operating costs and a discount rate commensurate with the risk on the properties and cost of capital. Unproved oil and natural gas properties are assessed periodically and, at a minimum, annually on a property-by-property basis, and any impairment in value is recognized when incurred.

Borrowings

Borrowings

The Company finances the majority of its investments through the use of secured borrowings in the form of securitization transactions structured as non-recourse secured financings and other secured and unsecured borrowings. In addition, the Company finances certain of its oil and gas asset acquisitions through borrowings. The Company recognizes interest expense on all borrowings on an accrual basis.

Trust Preferred Securities

Trust Preferred Securities

Trusts formed by the Company for the sole purpose of issuing trust preferred securities are not consolidated by the Company as the Company has determined that it is not the primary beneficiary of such trusts. The Company’s investment in the common securities of such trusts is included within other assets on the condensed consolidated balance sheets.

Preferred Shares

Preferred Shares

Distributions on the Company’s 7.375% Series A LLC Preferred Shares (“Series A LLC Preferred Shares”) are cumulative and payable quarterly when and if declared by the Company’s board of directors at a 7.375% rate per annum. The Company accrues for the distribution upon declaration and is included within accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets.

Derivative Instruments

Derivative Instruments

The Company recognizes all derivatives on the condensed consolidated balance sheet at estimated fair value. On the date the Company enters into a derivative contract, the Company designates and documents each derivative contract as one of the following at the time the contract is executed: (i) a hedge of a recognized asset or liability (“fair value” hedge); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (iii) a hedge of a net investment in a foreign operation; or (iv) a derivative instrument not designated as a hedging instrument (“free-standing derivative”). For a fair value hedge, the Company records changes in the estimated fair value of the derivative instrument and, to the extent that it is effective, changes in the fair value of the hedged asset or liability in the current period earnings in the same financial statement category as the hedged item. For a cash flow hedge, the Company records changes in the estimated fair value of the derivative to the extent that it is effective in accumulated other comprehensive loss and subsequently reclassifies these changes in estimated fair value to net income in the same period(s) that the hedged transaction affects earnings. The effective portion of the cash flow hedges is recorded in the same financial statement category as the hedged item. For free-standing derivatives, the Company reports changes in the fair values in other income.

The Company formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Company’s evaluation of effectiveness of its hedged transactions. Periodically, the Company also formally assesses whether the derivative it designated in each hedging relationship is expected to be and has been highly effective in offsetting changes in estimated fair values or cash flows of the hedged item using either the dollar offset or the regression analysis method. If the Company determines that a derivative is not highly effective as a hedge, it discontinues hedge accounting.

Foreign Currency

Foreign Currency

The Company makes investments in non-United States dollar denominated securities and loans. As a result, the Company is subject to the risk of fluctuation in the exchange rate between the United States dollar and the foreign currency in which it makes an investment. In order to reduce the currency risk, the Company may hedge the applicable foreign currency. All investments denominated in a foreign currency are converted to the United States dollar using prevailing exchange rates on the balance sheet date.

Income, expenses, gains and losses on investments denominated in a foreign currency are converted to the United States dollar using the prevailing exchange rates on the dates when they are recorded. Foreign exchange gains and losses are recorded in the condensed consolidated statements of operations.

Manager Compensation

Manager Compensation

The Management Agreement provides for the payment of a base management fee to the Manager, as well as an incentive fee if the Company’s financial performance exceeds certain benchmarks. Additionally, the Management Agreement provides for the Manager to be reimbursed for certain expenses incurred on the Company’s behalf. The base management fee and the incentive fee are accrued and expensed during the period for which they are earned by the Manager.

Share-Based Compensation

Share-Based Compensation

The Company accounts for share-based compensation issued to its directors and to its Manager using the fair value based methodology in accordance with relevant accounting guidance. Compensation cost related to restricted common shares issued to the Company’s directors is measured at its estimated fair value at the grant date, and is amortized and expensed over the vesting period on a straight-line basis. Compensation cost related to restricted common shares and common share options issued to the Manager is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards are unvested. The Company has elected to use the graded vesting attribution method to amortize compensation expense for the restricted common shares and common share options granted to the Manager.

Income Taxes

Income Taxes

The Company intends to continue to operate so as to qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation. Therefore, the Company generally is not subject to United States federal income tax at the entity level, but is subject to limited state and foreign taxes. Holders of the Company’s common and preferred shares will be required to take into account their allocable share of each item of the Company’s income, gain, loss, deduction, and credit for the taxable year of the Company ending within or with their taxable year.

The Company owns equity interests in entities that have elected or intend to elect to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). A REIT generally is not subject to United States federal income tax to the extent that it currently distributes its income and satisfies certain asset, income and ownership tests, and recordkeeping requirements, but it may be subject to some amount of federal, state, local and foreign taxes based on its taxable income.

The Company has wholly-owned domestic and foreign subsidiaries that are taxable as corporations for United States federal income tax purposes and thus are not consolidated with the Company for United States federal income tax purposes. For financial reporting purposes, current and deferred taxes are provided for on the portion of earnings recognized by the Company with respect to its interest in the domestic taxable corporate subsidiaries, because each is taxed as a regular corporation under the Code. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP consolidated financial statements and the United States federal income tax basis of assets and liabilities as of each consolidated balance sheet date. The foreign corporate subsidiaries were formed to make certain foreign and domestic investments from time to time. The foreign corporate subsidiaries are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands, and are anticipated to be exempt from United States federal and state income tax at the corporate entity level because they restrict their activities in the United States to trading in stock and securities for their own account. However, the Company will be required to include their current taxable income in the Company’s calculation of its taxable income allocable to shareholders.

The Company must recognize the tax impact from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax impact recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain tax positions are recorded as tax expense. Significant judgment is required in the identification of uncertain tax positions and in the estimation of penalties and interest on uncertain tax positions. If it is determined that recognition for an uncertain tax provision is necessary, the Company would record a liability for an unrecognized tax expense from an uncertain tax position taken or expected to be taken.

Earnings Per Common Share

Earnings Per Common Share

The Company presents both basic and diluted earnings per common share (“EPS”) in its condensed consolidated financial statements and footnotes thereto. Basic earnings per common share (“Basic EPS”) excludes dilution and is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares, including vested restricted common shares, outstanding for the period. The Company calculates EPS using the more dilutive of the two-class method or the if-converted method. The two-class method is an earnings allocation formula that determines EPS for common shares and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS using the two-class method. Accordingly, all earnings (distributed and undistributed) are allocated to common shares, preferred shares and participating securities based on their respective rights to receive dividends. Diluted earnings per common share (“Diluted EPS”) reflects the potential dilution of common share options, unvested restricted common shares and convertible senior notes using the treasury method or if-converted method.

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 3) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Dec. 31, 2011
Allowance for loan losses by basis of impairment method:
Ending balance: individually evaluated for impairment	$ 132,823		$ 94,863
Ending balance: collectively evaluated for impairment	79,771		128,609
Allowance for loan losses	212,594		223,472
Corporate loans (recorded investment) by basis of impairment method:
Recorded Investment	5,911,390		6,029,059
Corporate Loans
Allowance for loan losses by basis of impairment method:
Allowance for loan losses	212,594	203,255	223,472	225,882	235,807	191,407
Corporate loans (recorded investment) by basis of impairment method:
Ending balance: individually evaluated for impairment	554,541		445,437
Ending balance: collectively evaluated for impairment	5,356,849		5,583,622
Recorded Investment	$ 5,911,390		$ 6,029,059

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 5) (USD $) In Thousands, except Per Share data, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Minimum
Valuation techniques used for assets, measured at fair value
Weight ascribed to each valuation technique	0.00%	0.00%
Maximum
Valuation techniques used for assets, measured at fair value
Weight ascribed to each valuation technique	100.00%	100.00%
Unobservable Inputs | Common stock warrants
Valuation techniques used for assets, measured at fair value
Assets, fair value (in dollars)	$ 2,086	$ 1,574
Unobservable Inputs | Foreign exchange options
Valuation techniques used for assets, measured at fair value
Assets, fair value (in dollars)	8,420	8,562
Unobservable Inputs | Securities available-for-sale | Corporate debt securities
Valuation techniques used for assets, measured at fair value
Assets, fair value (in dollars)	38,951	42,221
Unobservable Inputs | Other securities, at estimated fair value
Valuation techniques used for assets, measured at fair value
Assets, fair value (in dollars)	36,202	2,909
Unobservable Inputs | Residential mortgage-backed securities
Valuation techniques used for assets, measured at fair value
Assets, fair value (in dollars)	79,386	83,842
Unobservable Inputs | Corporate loans, at estimated fair value
Valuation techniques used for assets, measured at fair value
Assets, fair value (in dollars)	84,481	16,141
Unobservable Inputs | Equity investments, at estimated fair value
Valuation techniques used for assets, measured at fair value
Assets, fair value (in dollars)	110,654	97,746
Unobservable Inputs | Equity investments, at estimated fair value | Minimum
Valuation techniques used for assets, measured at fair value
Illiquidity discount	5.00%	5.00%
Unobservable Inputs | Interests in joint ventures and partnerships
Valuation techniques used for assets, measured at fair value
Assets, fair value (in dollars)	332,921	142,477
Unobservable Inputs | Options
Valuation techniques used for assets, measured at fair value
Assets, fair value (in dollars)	$ 8,880
Unobservable Inputs | Yield Analysis | Securities available-for-sale | Corporate debt securities | Weighted Average
Valuation techniques used for assets, measured at fair value
Yield	13.00%	16.00%
Discount margin		14.50%
Net leverage	6	6
Illiquidity discount		3.00%
EBITDA multiple	9	7
Unobservable Inputs | Yield Analysis | Securities available-for-sale | Corporate debt securities | Minimum
Valuation techniques used for assets, measured at fair value
Yield	12.00%	11.00%
Discount margin		11.00%
Net leverage	6	3
EBITDA multiple	8	6
Unobservable Inputs | Yield Analysis | Securities available-for-sale | Corporate debt securities | Maximum
Valuation techniques used for assets, measured at fair value
Yield	14.00%	46.00%
Discount margin		45.50%
Net leverage	7	13
EBITDA multiple	9	8
Unobservable Inputs | Yield Analysis | Other securities, at estimated fair value | Weighted Average
Valuation techniques used for assets, measured at fair value
Yield	11.00%	10.00%
Illiquidity discount	5.00%
EBITDA multiple	7
Unobservable Inputs | Yield Analysis | Other securities, at estimated fair value | Minimum
Valuation techniques used for assets, measured at fair value
Yield	9.00%
Unobservable Inputs | Yield Analysis | Other securities, at estimated fair value | Maximum
Valuation techniques used for assets, measured at fair value
Yield	12.00%
Unobservable Inputs | Yield Analysis | Corporate loans, at estimated fair value | Weighted Average
Valuation techniques used for assets, measured at fair value
Yield	16.00%
Discount margin	14.50%
Net leverage	7	9
Illiquidity discount	10.00%	15.00%
EBITDA multiple	9	10
Unobservable Inputs | Yield Analysis | Corporate loans, at estimated fair value | Minimum
Valuation techniques used for assets, measured at fair value
Yield	11.00%
Discount margin	9.00%
Net leverage	5	8
EBITDA multiple	8	9
Unobservable Inputs | Yield Analysis | Corporate loans, at estimated fair value | Maximum
Valuation techniques used for assets, measured at fair value
Yield	16.00%
Discount margin	15.00%
Net leverage	15	9
EBITDA multiple	9	10
Unobservable Inputs | Broker quotes | Securities available-for-sale | Corporate debt securities | Weighted Average
Valuation techniques used for assets, measured at fair value
Offered quotes (in dollars per share)	$ 101	$ 88
Unobservable Inputs | Broker quotes | Securities available-for-sale | Corporate debt securities | Minimum
Valuation techniques used for assets, measured at fair value
Offered quotes (in dollars per share)	$ 70	$ 69
Unobservable Inputs | Broker quotes | Securities available-for-sale | Corporate debt securities | Maximum
Valuation techniques used for assets, measured at fair value
Offered quotes (in dollars per share)	$ 105	$ 105
Unobservable Inputs | Broker quotes | Corporate loans, at estimated fair value | Weighted Average
Valuation techniques used for assets, measured at fair value
Offered quotes (in dollars per share)	$ 38	$ 39
Unobservable Inputs | Broker quotes | Corporate loans, at estimated fair value | Minimum
Valuation techniques used for assets, measured at fair value
Offered quotes (in dollars per share)	$ 11	$ 8
Unobservable Inputs | Broker quotes | Corporate loans, at estimated fair value | Maximum
Valuation techniques used for assets, measured at fair value
Offered quotes (in dollars per share)	$ 38	$ 40
Unobservable Inputs | Discounted cash flow | Common stock warrants | Weighted Average
Valuation techniques used for assets, measured at fair value
Weighted average cost of capital		12.00%
LTM EBITDA exit multiple		7
Unobservable Inputs | Discounted cash flow | Residential mortgage-backed securities | Weighted Average
Valuation techniques used for assets, measured at fair value
Probability of default	10.00%	6.00%
Loss severity	26.00%	30.00%
Constant prepayment rate	16.00%	13.00%
Unobservable Inputs | Discounted cash flow | Residential mortgage-backed securities | Minimum
Valuation techniques used for assets, measured at fair value
Probability of default	0.00%	0.00%
Loss severity	12.00%	18.00%
Constant prepayment rate	3.00%	1.00%
Unobservable Inputs | Discounted cash flow | Residential mortgage-backed securities | Maximum
Valuation techniques used for assets, measured at fair value
Probability of default	41.00%	21.00%
Loss severity	78.00%	80.00%
Constant prepayment rate	33.00%	35.00%
Unobservable Inputs | Discounted cash flow | Equity investments, at estimated fair value | Weighted Average
Valuation techniques used for assets, measured at fair value
Weighted average cost of capital	11.00%	10.00%
LTM EBITDA exit multiple	9	9
Unobservable Inputs | Discounted cash flow | Equity investments, at estimated fair value | Minimum
Valuation techniques used for assets, measured at fair value
Weighted average cost of capital	8.00%	6.00%
LTM EBITDA exit multiple	7	7
Unobservable Inputs | Discounted cash flow | Equity investments, at estimated fair value | Maximum
Valuation techniques used for assets, measured at fair value
Weighted average cost of capital	14.00%	16.00%
LTM EBITDA exit multiple	11	12
Unobservable Inputs | Discounted cash flow | Interests in joint ventures and partnerships | Weighted Average
Valuation techniques used for assets, measured at fair value
Illiquidity discount	12.00%	10.00%
Weighted average cost of capital	13.00%	18.00%
Unobservable Inputs | Discounted cash flow | Interests in joint ventures and partnerships | Minimum
Valuation techniques used for assets, measured at fair value
Illiquidity discount	10.00%	10.00%
Weighted average cost of capital	10.00%	13.00%
Unobservable Inputs | Discounted cash flow | Interests in joint ventures and partnerships | Maximum
Valuation techniques used for assets, measured at fair value
Illiquidity discount	15.00%	15.00%
Weighted average cost of capital	27.00%	30.00%
Unobservable Inputs | Market comparables | Common stock warrants | Weighted Average
Valuation techniques used for assets, measured at fair value
Illiquidity discount		15.00%
LTM EBITDA multiple	8	7
Forward EBITDA multiple		7
Unobservable Inputs | Market comparables | Common stock warrants | Minimum
Valuation techniques used for assets, measured at fair value
LTM EBITDA multiple	7
Unobservable Inputs | Market comparables | Common stock warrants | Maximum
Valuation techniques used for assets, measured at fair value
LTM EBITDA multiple	8
Unobservable Inputs | Market comparables | Equity investments, at estimated fair value | Weighted Average
Valuation techniques used for assets, measured at fair value
Illiquidity discount	9.00%
LTM EBITDA multiple	12	10
Forward EBITDA multiple	11	10
Unobservable Inputs | Market comparables | Equity investments, at estimated fair value | Minimum
Valuation techniques used for assets, measured at fair value
Illiquidity discount	5.00%
LTM EBITDA multiple	6	7
Forward EBITDA multiple	9	6
Unobservable Inputs | Market comparables | Equity investments, at estimated fair value | Maximum
Valuation techniques used for assets, measured at fair value
Illiquidity discount	15.00%
LTM EBITDA multiple	15	12
Forward EBITDA multiple	13	12
Unobservable Inputs | Option pricing model | Foreign exchange options | Weighted Average
Valuation techniques used for assets, measured at fair value
Forward and spot rates, Assets	1	1
Unobservable Inputs | Option pricing model | Foreign exchange options | Minimum
Valuation techniques used for assets, measured at fair value
Forward and spot rates, Assets	0	0
Unobservable Inputs | Option pricing model | Foreign exchange options | Maximum
Valuation techniques used for assets, measured at fair value
Forward and spot rates, Assets	1	2

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NATURAL RESOURCES ASSETS (Details 2) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Acquisitions
Cost of acquired properties	$ 3,100,000
Recognized fair value of the identifiable assets acquired and liabilities assumed in connection with acquisitions
Additional amount capitalized	104,200,000
Oil and natural gas properties located in Louisiana, Mississippi, and Texas
Acquisitions
Cost of acquired properties		178,300,000
Increase in proved property	3,800,000
Increase in accounts payable and accrued liabilities	3,800,000
Recognized fair value of the identifiable assets acquired and liabilities assumed in connection with acquisitions
Proved property		164,557,000
Unproved property		2,658,000
Other assets		16,789,000
Risk management liabilities		(1,037,000)
Accounts payable and accrued liabilities		(9,030,000)
Asset retirement obligation		(5,491,000)
Total		168,446,000
Oil and natural gas properties located in Texas
Recognized fair value of the identifiable assets acquired and liabilities assumed in connection with acquisitions
Amount borrowed to finance the acquisition		$ 1,400,000

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COMMITMENTS & CONTINGENCIES (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Guarantees
Non-recourse debt	$ 231.7
Financial guarantees related to natural resources investments	17.9	17.9
Debt Instrument
Estimated future contributions for interests in joint ventures and partnerships		203.0
Minimum
Debt Instrument
Estimated future contributions for interests in joint ventures and partnerships	290.0
Maximum
Debt Instrument
Estimated future contributions for interests in joint ventures and partnerships	300.0
Corporate Loans
Debt Instrument
Aggregate par amounts to purchase corporate loans	209.7	254.2
Unfunded financing commitments for corporate loans	$ 5.0	$ 9.8

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SECURITIES (Details 2) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Unrealized losses on available for sale securities in a gross continuous unrealized loss position by the length of time
Other-than-temporarily impaired loss	$ 5,000,000	$ 7,400,000	$ 17,500,000	$ 8,400,000
Corporate debt securities
Unrealized losses on available for sale securities in a gross continuous unrealized loss position by the length of time
Number of issuers with corporate debt securities in default	1		1
Number of corporate debt securities in default	1		1		0
Estimated fair value of corporate debt security in default	23,600,000		23,600,000
Common and preferred stock
Unrealized losses on available for sale securities in a gross continuous unrealized loss position by the length of time
Other-than-temporarily impaired loss	0	0	0	200,000
Amount of investment in common and preferred stock	0		0
Securities available-for-sale
Fair value on available for sale securities in a gross continuous unrealized loss position by the length of time
Less Than 12 months	3,913,000		3,913,000		45,900,000
12 Months or More	28,655,000		28,655,000		37,500,000
Total Estimated Fair Value	32,568,000		32,568,000		83,400,000
Unrealized losses on available for sale securities in a gross continuous unrealized loss position by the length of time
Less Than 12 months	(125,000)		(125,000)		(4,398,000)
12 months or More	(1,944,000)		(1,944,000)		(5,411,000)
Total Unrealized Losses	(2,069,000)		(2,069,000)		(9,809,000)
Other-than-temporarily impaired loss	$ 5,000,000	$ 7,400,000	$ 17,500,000	$ 8,200,000

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Nonaffiliates
Collateralized Debt Obligation disclosures
Aggregate secured outstanding debt related to CLOs, held by third parties	$ 4,903,438,000	$ 5,122,338,000
Affiliates
Collateralized Debt Obligation disclosures
Collateralized loan obligation junior secured notes to affiliates	193,921,000	296,557,000
Collateralized Debt Obligation (CLOs) VIEs
Collateralized Debt Obligation disclosures
Number of Collateralized Loan Obligation (CLOs) VIEs	8	7
Corporate debt investment, par amount	6,500,000,000	6,300,000,000
Estimated fair value of corporate debt instruments	6,200,000,000	6,000,000,000
Collateralized Debt Obligation (CLOs) VIEs | Nonaffiliates
Collateralized Debt Obligation disclosures
Aggregate secured outstanding debt related to CLOs, held by third parties	4,900,000,000
Collateralized Debt Obligation (CLOs) VIEs | Affiliates
Collateralized Debt Obligation disclosures
Collateralized loan obligation junior secured notes to affiliates	$ 193,900,000

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2)	0 Months Ended	9 Months Ended
	Jan. 17, 2013	Sep. 30, 2013
Consolidation
Minimum percentage of voting interest required to consolidate non-VIEs		50.00%
Fair Value of Financial Instruments
Number of approaches used to determine fair value of investments		2
Corporate Loans
Period for determination of non-accrual status		180 days
Allowance for Loan Losses
Number of components in the loans receivable allowance for loan losses		2
Number of internally assigned risk grades		3
Series A LLC Preferred Shares
Preferred Shares
Preferred shares, dividend rate (as a percent)	7.375%	7.375%

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NATURAL RESOURCES ASSETS

9 Months Ended

Sep. 30, 2013

NATURAL RESOURCES ASSETS

NATURAL RESOURCES ASSETS

NOTE 6. NATURAL RESOURCES ASSETS

Natural Resources Properties

The following table summarizes the Company’s oil and gas properties as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013			As of December 31, 2012
Proved oil and natural gas properties (successful efforts method)	$	394,370		$	315,446
Unproved oil and natural gas properties	35,445			2,596
Less: Accumulated depreciation, depletion and amortization	(57,781		)	(28,113		)
Oil and gas properties, net	$	372,034		$	289,929

The Company did not record any impairment for the three and nine months ended September 30, 2013. During the three and nine months ended September 30, 2012, the Company recorded $0.3 million and $3.3 million, respectively, of impairments.

Acquisitions

The Company accounts for certain of its oil and natural gas properties as business combinations under the acquisition method of accounting.

During 2013, the Company capitalized $3.1 million primarily as a result of covering costs related to certain oil and gas properties. Accordingly, this balance is included in oil and gas properties, net on the condensed consolidated balance sheets.

During 2012, the Company completed the acquisition of certain oil and natural gas properties located in Louisiana, Mississippi and Texas (most notably in the Barnett and Eagle Ford Shale), by funding approximately $178.3 million including working capital and costs, partially financed through its asset-based borrowing facility.

The results of operations of these properties have been included in the condensed consolidated financial statements since the acquisition dates. As these acquisitions were accounted for under the acquisition method of accounting, the Company conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. Transaction and integration costs associated with the acquisitions were expensed as incurred.

The initial accounting for the 2012 business combinations was not complete and adjustments were subsequently recorded as additional information was obtained about the facts and circumstances that existed as of the acquisition dates. During the nine months ended September 30, 2013, the Company recorded adjustments to the recognized fair values of the identifiable assets acquired and liabilities assumed in connection with the Company’s acquisitions as of their respective acquisition dates. The table below reflects updated 2012 information including an increase of $3.8 million to both proved property and accounts payable and accrued liabilities (amounts in thousands):

	2013		2012
Proved property	$	—	$	164,557
Unproved property	—		2,658
Other assets	—		16,789
Risk management liabilities	—		(1,037		)
Accounts payable and accrued liabilities	—		(9,030		)
Asset retirement obligation	—		(5,491		)
Total	$	—	$	168,446

Development and Other Purchases

During 2013, the Company capitalized an additional $104.2 million as a result of purchasing natural resources assets or covering costs related to the development of oil and gas properties. Accordingly, this balance is included in oil and gas properties, net on the condensed consolidated balance sheets.

In addition to the acquisitions above, during 2012, the Company participated and earned working interests in oil and natural gas properties located in Texas by funding approximately $1.4 million including costs. This amount is included in oil and gas properties, net on the condensed consolidated balance sheets.

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DERIVATIVE INSTRUMENTS (Details 3) (USD $) In Thousands, unless otherwise specified			9 Months Ended
	Sep. 30, 2013 Foreign exchange options and forward contracts	Dec. 31, 2012 Foreign exchange options and forward contracts	Sep. 30, 2013 Free-Standing Derivatives: Natural gas positions 2013 MMBTU	Sep. 30, 2013 Free-Standing Derivatives: Natural gas positions 2014 MMBTU	Sep. 30, 2013 Free-Standing Derivatives: Natural gas positions 2015 MMBTU	Sep. 30, 2013 Free-Standing Derivatives: Natural gas positions 2016 MMBTU	Sep. 30, 2013 Free-Standing Derivatives: Natural gas liquid positions 2013 MBbls	Sep. 30, 2013 Free-Standing Derivatives: Natural gas liquid positions 2014 MBbls	Sep. 30, 2013 Free-Standing Derivatives: Oil positions 2013 MBbls	Sep. 30, 2013 Free-Standing Derivatives: Oil positions 2014 MBbls	Sep. 30, 2013 Free-Standing Derivatives: Oil positions 2015 MBbls	Sep. 30, 2013 Free-Standing Derivatives: Credit default swaps-protection purchased	Dec. 31, 2012 Free-Standing Derivatives: Credit default swaps-protection purchased
Fixed price swaps
Hedged volume (MBbls)							48	145	114	626	253
Hedged volume (MMBtu)			1,691	5,821	4,277	1,805
Average price ($/Bbl)							32.05	27.89	101.58	95.05	89.18
Average price ($/MMBtu)			3.60	3.86	4.07	4.17
Notional amount
Notional amount	$ 163,300	$ 208,100										$ (109,953)	$ (47,321)

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ACCUMULATED OTHER COMPREHENSIVE LOSS (Tables)

9 Months Ended

Sep. 30, 2013

ACCUMULATED OTHER COMPREHENSIVE LOSS

Schedule of components of changes in accumulated other comprehensive loss

The components of changes in accumulated other comprehensive loss were as follows (amounts in thousands):

	Three months endedSeptember 30, 2013(1)									Nine months endedSeptember 30, 2013(1)
	Net unrealized gains on available-for-sale securities			Net unrealized losses on cash flow hedges			Total			Net unrealized gains on available-for-sale securities			Net unrealized losses on cash flow hedges			Total
Beginning balance	$	16,657		$	(56,300	)	$	(39,643	)	$	17,472		$	(87,698	)	$	(70,226	)
Other comprehensive (loss) income before reclassifications	(1,871		)	6,813			4,942			(11,580		)	38,211			26,631
Amounts reclassified from accumulated other comprehensive loss(2)	5,008			—			5,008			13,902			—			13,902
Net current-period other comprehensive income	3,137			6,813			9,950			2,322			38,211			40,533
Ending balance	$	19,794		$	(49,487	)	$	(29,693	)	$	19,794		$	(49,487	)	$	(29,693	)

(1) The Company’s gross and net of tax amounts are the same.

(2) Includes an impairment charge of $5.0 million and $17.5 million for investments which were determined to be other-than-temporary for the three and nine months ended September 30, 2013, respectively. These reclassified amounts are included in net realized and unrealized gain on investments on the condensed consolidated statements of operations.

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details) (USD $)	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Dec. 31, 2011
Summary of corporate loans
Principal	$ 6,558,399,000		$ 6,431,761,000
Net unamortized discount	(173,434,000)		(248,610,000)
Total amortized cost	6,384,965,000		6,183,151,000
Lower of cost or fair value adjustment	(24,843,000)		(14,047,000)
Allowance for loan losses	(212,594,000)		(223,472,000)
Unrealized gains	5,544,000		2,225,000
Net carrying value	6,153,072,000		5,947,857,000
Corporate Loans
Summary of corporate loans
Principal	6,006,179,000		6,143,599,000
Net unamortized discount	(109,420,000)		(136,438,000)
Total amortized cost	5,896,759,000		6,007,161,000
Allowance for loan losses	(212,594,000)	(203,255,000)	(223,472,000)	(225,882,000)	(235,807,000)	(191,407,000)
Net carrying value	5,684,165,000		5,783,689,000
Corporate Loans Held for Sale
Summary of corporate loans
Principal	362,853,000		231,231,000
Net unamortized discount	(25,698,000)		(88,895,000)
Total amortized cost	337,155,000		142,336,000
Lower of cost or fair value adjustment	(24,843,000)		(14,047,000)
Net carrying value	312,312,000		128,289,000
Corporate Loans, at Estimated Fair Value
Summary of corporate loans
Principal	189,367,000		56,931,000
Net unamortized discount	(38,316,000)		(23,277,000)
Total amortized cost	151,051,000		33,654,000
Unrealized gains	5,544,000		2,225,000
Net carrying value	156,595,000		35,879,000
Corporate loans and corporate loans held for sale
Summary of corporate loans
Cumulative charge-offs and other adjustments	$ 21,100,000		$ 51,600,000

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ACCUMULATED OTHER COMPREHENSIVE LOSS

9 Months Ended

Sep. 30, 2013

ACCUMULATED OTHER COMPREHENSIVE LOSS

ACCUMULATED OTHER COMPREHENSIVE LOSS

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of changes in accumulated other comprehensive loss were as follows (amounts in thousands):

	Three months endedSeptember 30, 2013(1)									Nine months endedSeptember 30, 2013(1)
	Net unrealized gains on available-for-sale securities			Net unrealized losses on cash flow hedges			Total			Net unrealized gains on available-for-sale securities			Net unrealized losses on cash flow hedges			Total
Beginning balance	$	16,657		$	(56,300	)	$	(39,643	)	$	17,472		$	(87,698	)	$	(70,226	)
Other comprehensive (loss) income before reclassifications	(1,871		)	6,813			4,942			(11,580		)	38,211			26,631
Amounts reclassified from accumulated other comprehensive loss(2)	5,008			—			5,008			13,902			—			13,902
Net current-period other comprehensive income	3,137			6,813			9,950			2,322			38,211			40,533
Ending balance	$	19,794		$	(49,487	)	$	(29,693	)	$	19,794		$	(49,487	)	$	(29,693	)

(1) The Company’s gross and net of tax amounts are the same.

(2) Includes an impairment charge of $5.0 million and $17.5 million for investments which were determined to be other-than-temporary for the three and nine months ended September 30, 2013, respectively. These reclassified amounts are included in net realized and unrealized gain on investments on the condensed consolidated statements of operations.

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Assets:
Securities available-for-sale	$ 368,376	$ 412,293
Total securities	519,675	533,520
Corporate loans, estimated fair value	156,595	35,879
Equity investments, at estimated fair value	191,153	161,621
Derivatives:
Total derivatives	35,348	23,207
Liabilities:
Total derivatives	86,108	117,270
Significant Other Observable Inputs (Level 2)
Other assets:
Other assets	11,378	16,439
Significant Unobservable Inputs (Level 3)
Other assets:
Other assets		338
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Equity investments, at estimated fair value	46,753	23,790
Derivatives:
Total derivatives	2,455	1,744
Other assets:
Total	49,208	25,534
Liabilities:
Securities sold, not yet purchased	2,662	1,158
Total	2,662	1,158
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | Common stock warrants
Derivatives:
Derivative assets	2,455	1,744
Recurring basis | Significant Other Observable Inputs (Level 2)
Assets:
Securities available-for-sale	329,425	370,072
Total securities	365,136	404,548
Equity investments, at estimated fair value	33,746	40,085
Derivatives:
Total derivatives	13,507	11,327
Other assets:
Other assets	534	319
Total other assets	534	319
Total	485,037	476,017
Liabilities:
Total derivatives	85,619	116,985
Total	85,619	116,985
Recurring basis | Significant Other Observable Inputs (Level 2) | Other securities, at estimated fair value
Assets:
Trading securities	35,711	34,476
Recurring basis | Significant Other Observable Inputs (Level 2) | Commodity swaps
Derivatives:
Derivative assets	7,464	8,557
Liabilities:
Derivative liabilities	3,134	1,501
Recurring basis | Significant Other Observable Inputs (Level 2) | Interest rate swaps
Derivatives:
Derivative assets	2,294
Liabilities:
Derivative liabilities	54,626	90,618
Recurring basis | Significant Other Observable Inputs (Level 2) | Foreign exchange forward contracts
Derivatives:
Derivative assets	3,016	2,615
Liabilities:
Derivative liabilities	26,190	23,590
Recurring basis | Significant Other Observable Inputs (Level 2) | Credit default swaps-protection sold
Derivatives:
Derivative assets		19
Recurring basis | Significant Other Observable Inputs (Level 2) | Credit default swaps-protection purchased
Derivatives:
Derivative assets	4	136
Liabilities:
Derivative liabilities	1,669	1,276
Recurring basis | Significant Other Observable Inputs (Level 2) | Total Rate of Return Swaps
Derivatives:
Derivative assets	729
Recurring basis | Significant Other Observable Inputs (Level 2) | Portion at estimated fair value
Assets:
Corporate loans, estimated fair value	72,114	19,738
Recurring basis | Significant Unobservable Inputs (Level 3)
Assets:
Securities available-for-sale	38,951	42,221
Total securities	154,539	128,972
Equity investments, at estimated fair value	110,654	97,746
Derivatives:
Total derivatives	19,386	10,136
Other assets:
Interests in joint ventures and partnerships	332,921	142,477
Total other assets	332,921	142,477
Total	701,981	395,472
Liabilities:
Total derivatives	489	285
Total	489	285
Recurring basis | Significant Unobservable Inputs (Level 3) | Other securities, at estimated fair value
Assets:
Trading securities	36,202	2,909
Recurring basis | Significant Unobservable Inputs (Level 3) | Residential mortgage-backed securities
Assets:
Trading securities	79,386	83,842
Recurring basis | Significant Unobservable Inputs (Level 3) | Foreign exchange options
Derivatives:
Derivative assets	8,420	8,562
Liabilities:
Derivative liabilities	489	285
Recurring basis | Significant Unobservable Inputs (Level 3) | Common stock warrants
Derivatives:
Derivative assets	2,086	1,574
Recurring basis | Significant Unobservable Inputs (Level 3) | Options
Derivatives:
Derivative assets	8,880
Recurring basis | Significant Unobservable Inputs (Level 3) | Portion at estimated fair value
Assets:
Corporate loans, estimated fair value	84,481	16,141
Recurring basis | Estimated Fair Value
Assets:
Securities available-for-sale	368,376	412,293
Total securities	519,675	533,520
Corporate loans, estimated fair value	156,595	35,879
Equity investments, at estimated fair value	191,153	161,621
Derivatives:
Total derivatives	35,348	23,207
Other assets:
Interests in joint ventures and partnerships	332,921	142,477
Other assets	534	319
Total other assets	333,455	142,796
Total	1,236,226	897,023
Liabilities:
Securities sold, not yet purchased	2,662	1,158
Total derivatives	86,108	117,270
Total	88,770	118,428
Recurring basis | Estimated Fair Value | Other securities, at estimated fair value
Assets:
Trading securities	71,913	37,385
Recurring basis | Estimated Fair Value | Residential mortgage-backed securities
Assets:
Trading securities	79,386	83,842
Recurring basis | Estimated Fair Value | Foreign exchange options
Derivatives:
Derivative assets	8,420	8,562
Liabilities:
Derivative liabilities	489	285
Recurring basis | Estimated Fair Value | Commodity swaps
Derivatives:
Derivative assets	7,464	8,557
Liabilities:
Derivative liabilities	3,134	1,501
Recurring basis | Estimated Fair Value | Common stock warrants
Derivatives:
Derivative assets	4,541	3,318
Recurring basis | Estimated Fair Value | Interest rate swaps
Derivatives:
Derivative assets	2,294
Liabilities:
Derivative liabilities	54,626	90,618
Recurring basis | Estimated Fair Value | Foreign exchange forward contracts
Derivatives:
Derivative assets	3,016	2,615
Liabilities:
Derivative liabilities	26,190	23,590
Recurring basis | Estimated Fair Value | Credit default swaps-protection sold
Derivatives:
Derivative assets		19
Recurring basis | Estimated Fair Value | Credit default swaps-protection purchased
Derivatives:
Derivative assets	4	136
Liabilities:
Derivative liabilities	1,669	1,276
Recurring basis | Estimated Fair Value | Total Rate of Return Swaps
Derivatives:
Derivative assets	729
Recurring basis | Estimated Fair Value | Options
Derivatives:
Derivative assets	$ 8,880

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2013

CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES

CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 5. CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES

The Company accounts for loans based on the following categories (i) corporate loans held for investment, which are measured based on their outstanding principal plus or minus unaccreted purchase discounts and unamortized purchase premiums, net of an allowance for loan losses; (ii) corporate loans held for sale, which are measured at lower of cost or estimated fair value; and (iii) corporate loans, at estimated fair value.

The following table summarizes the Company’s corporate loans as of September 30, 2013 (amounts in thousands):

	September 30, 2013
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,006,179		$	362,853		$	189,367		$	6,558,399
Net unamortized discount	(109,420		)	(25,698		)	(38,316		)	(173,434		)
Total amortized cost	5,896,759			337,155			151,051			6,384,965
Lower of cost or fair value adjustment	—			(24,843		)	—			(24,843		)
Allowance for loan losses	(212,594		)	—			—			(212,594		)
Unrealized gains	—			—			5,544			5,544
Net carrying value	$	5,684,165		$	312,312		$	156,595		$	6,153,072

(1) Principal amounts of corporate loans and corporate loans held for sale are net of cumulative charge-offs and other adjustments totaling $21.1 million as of September 30, 2013.

The following table summarizes the Company’s corporate loans as of December 31, 2012 (amounts in thousands):

	December 31, 2012
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,143,599		$	231,231		$	56,931		$	6,431,761
Net unamortized discount	(136,438		)	(88,895		)	(23,277		)	(248,610		)
Total amortized cost	6,007,161			142,336			33,654			6,183,151
Lower of cost or fair value adjustment	—			(14,047		)	—			(14,047		)
Allowance for loan losses	(223,472		)	—			—			(223,472		)
Unrealized gains	—			—			2,225			2,225
Net carrying value	$	5,783,689		$	128,289		$	35,879		$	5,947,857

(1) Principal amounts of corporate loans and corporate loans held for sale are net of cumulative charge-offs and other adjustments totaling $51.6 million as of December 31, 2012.

Allowance for Loan Losses

As of September 30, 2013 and December 31, 2012, the Company had an allowance for loan losses of $212.6 million and $223.5 million, respectively. As described in Note 2 to these condensed consolidated financial statements, the allowance for loan losses represents the Company’s estimate of probable credit losses inherent in its loan portfolio as of the balance sheet date. The Company’s allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses consists of individual loans that are impaired. The unallocated component of the allowance for loan losses represents the Company’s estimate of losses inherent, but not identified, in its portfolio as of the balance sheet date.

The following table summarizes the changes in the allowance for loan losses for the Company’s corporate loan portfolio during the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012			For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Allowance for loan losses:
Beginning balance	$	203,255	$	235,807		$	223,472		$	191,407
Provision for loan losses	9,339		—			20,407			46,498
Charge-offs	—		(9,925		)	(31,285		)	(12,023		)
Ending balance	$	212,594	$	225,882		$	212,594		$	225,882

The following table summarizes the ending balances of the allowance and corporate loans portfolio by basis of impairment method as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	September 30, 2013		December 31, 2012(1)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	132,823	$	94,863
Ending balance: collectively evaluated for impairment	79,771		128,609
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	212,594	$	223,472
Corporate loans (recorded investment)(2):
Ending balance: individually evaluated for impairment	$	554,541	$	445,437
Ending balance: collectively evaluated for impairment	5,356,849		5,583,622
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	5,911,390	$	6,029,059

(1) Certain prior period information has been reclassified to conform to the current year presentation to segregate the Company’s corporate loan portfolio between those that are included in the allocated component of the allowance for loan losses (individually evaluated) and those included in the unallocated component of the allowance for loan losses (collectively evaluated).

(2) Recorded investment is defined as amortized cost plus accrued interest.

As of September 30, 2013, the allocated component of the allowance for loan losses totaled $132.8 million and relates to investments in certain loans issued by four issuers with an aggregate par amount of $594.5 million and an aggregate recorded investment of $554.5 million. Of the allocated component totaling $132.8 million, $69.5 million related to Texas Competitive Electric Holdings Company LLC (“TXU”), which had an aggregate amortized cost of $311.6 million as of September 30, 2013. As of December 31, 2012, the allocated component of the allowance for loan losses totaled $94.9 million and related to investments in certain loans issued by six issuers with an aggregate par amount of $484.1 million and an aggregate recorded investment of $445.4 million.

The following table summarizes the Company’s recorded investment and unpaid principal balance in impaired loans, as well as the related allowance for credit losses as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	September 30, 2013						December 31, 2012
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Recorded Investment(1)		Unpaid Principal Balance		Related Allowance
With no related allowance recorded	$	—	$	—	$	—	$	6,490	$	19,931	$	—
With an allowance recorded	554,541		594,548		132,823		438,947		464,214		94,863
Total	$	554,541	$	594,548	$	132,823	$	445,437	$	484,145	$	94,863

(1) Recorded investment is defined as amortized cost plus accrued interest.

The following table summarizes the Company’s average recorded investment in impaired loans and interest income recognized for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013				For the three months endedSeptember 30, 2012				For the nine months endedSeptember 30, 2013				For the nine months endedSeptember 30, 2012
	Average Recorded Investment(1)		InterestIncome Recognized		Average Recorded Investment(1)		InterestIncome Recognized		Average Recorded Investment(1)		InterestIncome Recognized		Average Recorded Investment(1)		InterestIncome Recognized
With no related allowance recorded	$	—	$	—	$	5,605	$	103	$	1,623	$	—	$	2,803	$	103
With an allowance recorded	554,554		4,471		209,375		3,941		517,544		14,740		139,117		5,722
Total	$	554,554	$	4,471	$	214,980	$	4,044	$	519,167	$	14,740	$	141,920	$	5,825

(1) Recorded investment is defined as amortized cost plus accrued interest.

As of September 30, 2013 and December 31, 2012, the allocated component of the allowance for loan losses included all impaired loans. While all of the Company’s impaired loans are on non-accrual status, the Company’s non-accrual loans also include (i) other loans held for investment, (ii) corporate loans held for sale and (iii) loans carried at estimated fair value, which are not reflected in the table above. Any of these three classifications may include those loans modified in a TDR, which are typically designated as being non-accrual (see “Troubled Debt Restructurings” section below).

The following table summarizes the Company’s recorded investment in non-accrual loans as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	September 30, 2013		December 31, 2012
Loans held for investment(1)	$	554,541	$	445,437
Loans held for sale	51,076		90,840
Loans at estimated fair value	13,191		—
Total non-accrual loans	$	618,808	$	536,277

(1) Comprised of impaired loans held for investment as of both September 30, 2013 and December 31, 2012.

The amount of interest income recognized using the cash-basis method during the time within the period that the loans were on non-accrual status was $5.5 million, which included $4.5 million for non-accrual loans that were held for investment and $1.0 million for non-accrual loans held for sale, for the three months ended September 30, 2013, and $20.9 million, which included $14.7 million for non-accrual loans that were held for investment and $6.2 million for non-accrual loans held for sale, for the nine months ended September 30, 2013. The amount of interest income recognized using the cash-basis method during the time within the period that the loans were on non-accrual was $8.4 million, which included $4.0 million for non-accrual loans that were held for investment and $4.4 million for non-accrual loans held for sale, for the three months ended September 30, 2012, and $15.1 million, which included $5.8 million for non-accrual loans that were held for investment and $9.3 million for non-accrual loans held for sale, for the nine months ended September 30, 2012.

A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. A loan may be placed on non-accrual status regardless of whether or not such loan is considered past due. As of September 30, 2013, the Company held a total recorded investment of $203.7 million of non-accrual and past due loans held for investment from two issuers, both of which were in default as of September 30, 2013. The associated past due interest payments related to the $203.7 million recorded investment was $2.5 million, of which $0.4 million was less than 30 days past due, $0.8 million was 30-59 days past due, $0.7 million was 60-89 days past due, and $0.6 million was 90 or more days past due. In addition, as of September 30, 2013, the Company held $15.5 million par amount and $11.4 million estimated fair value of non-accrual and past due loans carried at estimated fair value from one issuer, which was also in default as of September 30, 2013. The associated interest payments related to the $11.4 million loans at estimated fair value that were 90 or more days past due was less than $0.1 million. The Company did not have any corporate loans past due as of December 31, 2012.

The unallocated component of the allowance for loan losses totaled $79.8 million and $128.6 million as of September 30, 2013 and December 31, 2012, respectively. As described in Note 2 to these condensed consolidated financial statements, the Company estimates the unallocated component of the allowance for loan losses through a comprehensive review of its loan portfolio and identifies certain loans that demonstrate possible indicators of impairments, including credit quality indicators. The following table summarizes how the Company determines internally assigned grades related to credit quality based on a combination of concern as to probability of default and the seniority of the loan in the issuer’s capital structure as of September 30, 2013 and December 31, 2012 (amounts in thousands):

Internally Assigned Grade	Capital Hierarchy	Recorded Investment September 30, 2013 (1)		Recorded Investment December 31, 2012 (1)
High	Senior Secured Loan	$	27,093	$	525,562
	Second Lien Loan	286,974		287,892
	Subordinated	11,302		10,621
		$	325,369	$	824,075
Moderate	Senior Secured Loan	$	986,481	$	826,107
	Second Lien Loan	27,504		27,585
	Subordinated	37,070		38,374
		$	1,051,055	$	892,066
Low	Senior Secured Loan	$	3,900,851	$	3,716,831
	Second Lien Loan	41,619		68,917
	Subordinated	37,955		81,733
		$	3,980,425	$	3,867,481
	Total Unallocated	$	5,356,849	$	5,583,622
	Total Allocated	554,541		445,437
	Total Loans Held for Investment	$	5,911,390	$	6,029,059

(1) Recorded investment is defined as amortized cost plus accrued interest.

During the three and nine months ended September 30, 2013, the Company recorded charge-offs totaling zero and $31.3 million comprised primarily of loans modified in TDRs, respectively. During the three and nine months ended September 30, 2012, the Company recorded charge-offs totaling $9.9 million and $12.0 million, respectively, comprised primarily of a loan that was restructured and loans transferred to loans held for sale.

Loans Held For Sale and the Lower of Cost or Fair Value Adjustment

As of September 30, 2013 and December 31, 2012, the Company had $312.3 million and $128.3 million of loans held for sale, respectively. During the three and nine months ended September 30, 2013, the Company transferred $239.2 million and $316.0 million amortized cost amount, respectively, of loans from held for investment to held for sale. During the three and nine months ended September 30, 2012, the Company transferred $24.0 million and $87.0 million amortized cost amount, respectively, of loans from held for investment to held for sale. The transfers of certain loans to held for sale were due to the Company’s determination that credit quality of a loan in relation to its expected risk-adjusted return no longer met the Company’s investment objective and the determination by the Company to reduce or eliminate the exposure for certain loans as part of its portfolio risk management practices. Also, during both the three and nine months ended September 30, 2013, the Company did not transfer any loans held for sale back to loans held for investment. During the three and nine months ended September 30, 2012, the Company transferred $49.0 million and $114.9 million amortized cost amount, respectively, from loans held for sale back to loans held for investment at the lower of cost or estimated fair value. These transfers back to held for investment occurred as the circumstances that led to the initial transfer to held for sale were no longer present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy.

The Company recorded a $2.8 million and $11.4 million net charge to earnings for the three and nine months ended September 30, 2013, respectively, for the lower of cost or estimated fair value adjustment for certain loans held for sale, which had a carrying value of $312.3 million as of September 30, 2013. Comparatively, the Company recorded a $7.4 million and $1.3 million reduction to the lower of cost or estimated fair value adjustment during the three and nine months ended September 30, 2012, respectively, for certain loans held for sale, which had a carrying value of $137.9 million as of September 30, 2012.

Defaulted Loans

As of September 30, 2013, the Company held six corporate loans that were in default with a total amortized cost of $215.7 million from two issuers. Of the $215.7 million total amortized cost, $203.7 million were included in the loans that comprised the allocated component of the Company’s allowance for loan losses and $12.0 million were included in loans carried at estimated fair value. As of December 31, 2012, the Company held two corporate loans that were in default with a total amortized cost of $50.4 million from one issuer and were included in the loans that comprised the allocated component of the Company’s allowance for loan losses.

Troubled Debt Restructurings

The recorded investment balance of TDRs totaled $61.7 million related to four TDRs and $25.5 million related to one TDR at September 30, 2013 and December 31, 2012, respectively. Loans whose terms have been modified in a TDR are considered impaired, unless accounted for at fair value or the lower of cost or estimated fair value, and are typically placed on non-accrual status, but can be moved to accrual status when, among other criteria, payment in full of all amounts due under the restructured terms is expected and the borrower has demonstrated a sustained period of repayment performance, typically six months. As of September 30, 2013 and December 31, 2012, $61.7 million and $25.5 million of TDRs were included in non-accrual loans, respectively (see “Allowance for Loan Losses” section above). As of September 30, 2013 and December 31, 2012, the allowance for loan losses included specific reserves of $9.4 million and $0.5 million related to TDRs, respectively. As of September 30, 2013, there were no commitments to lend additional funds to the borrowers whose loans had been modified in a TDR.

The following table presents the aggregate balance of loans by loan class whose terms have been modified in a TDR during the three and nine months ended September 30, 2013. There were zero and three new TDRs during the three and nine months ended September 30, 2013, respectively, and no loans were modified in a TDR during both the three and nine months ended September 30, 2012. The modifications in the first quarter of 2013 involved conversions of the loans into one of the following: (i) new term loans with extended maturities and fixed, rather than floating, interest rates, (ii) equity carried at estimated fair value, or (iii) a combination of equity and loans carried at estimated fair value. The modification involving an extension of maturity date was for an additional four-year period with a higher coupon of 6.8%.

	Three months endedSeptember 30, 2013					Nine months endedSeptember 30, 2013
	Number of loans	Pre-modification outstanding recorded investment(1)		Post-modification outstanding recorded investment(1)		Number of loans	Pre-modification outstanding recorded investment(1)		Post-modification outstanding recorded investment(1)(2)
Troubled debt restructurings:
Loans held for investment	—	$	—	$	—	2	$	68,358	$	39,430
Loans held for sale	—	—		—		—	—		—
Loans at estimated fair value	—	—		—		1	1,670		1,229
Total	—	$	—	$	—	3	$	70,028	$	40,659

(1) Recorded investment is defined as amortized cost plus accrued interest.

(2) Excludes equity securities received from the TDRs with an estimated fair value of $2.1 million.

Prior to TDRs in the first quarter of 2013, two of the new TDRs described above were already identified as impaired and had specific allocated reserves, while the third was a loan carried at estimated fair value. Upon restructuring the two impaired loans held for investment, the difference between the recorded investment of the pre-modified loans and the estimated fair value of the new assets was charged-off against the allowance for loan losses. The TDRs resulted in zero and $26.8 million of charge-offs for the three and nine months ended September 30, 2013, respectively, which comprised 86% of the total $31.3 million of charge-offs recorded during the nine months ended September 30, 2013.

As of September 30, 2013, no loans modified as TDRs were in default within a twelve month period subsequent to their original restructuring.

The Company modified $195.6 million and $2.0 billion amortized cost of corporate loans during the three and nine months ended September 30, 2013, respectively, that did not qualify as TDRs. The Company modified $346.7 million and $1.4 billion amortized cost of corporate loans during the three and nine months ended September 30, 2012, respectively, that did not qualify as TDRs. These modifications involved changes in existing rates and maturities to prevailing market rates/maturities for similar instruments and did not qualify as TDRs as the respective borrowers were neither experiencing financial difficulty nor were seeking (nor granted) a concession as part of the modification. In addition, these modifications of non-troubled debt holdings were accomplished with modified loans that were not substantially different from the loans prior to modification.

Concentration Risk

The Company’s corporate loan portfolio has certain credit risk concentrated in a limited number of issuers. As of September 30, 2013, approximately 47% of the total amortized cost basis of the Company’s corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by TXU, Modular Space Corporation and U.S. Foods Inc., which combined represented $935.8 million or approximately 15% of the aggregated amortized cost basis of the Company’s corporate loans. As of December 31, 2012, approximately 46% of the total amortized cost basis of the Company’s corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foods Inc., TXU and Modular Space Corporation, which combined represented $1.0 billion, or approximately 16% of the aggregated amortized cost basis of the Company’s corporate loans.

Pledged Assets

Note 7 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged loans for borrowings. The following table summarizes the amortized cost of corporate loans and corporate loans held for sale pledged as collateral as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013		As ofDecember 31, 2012
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	5,997,105	$	5,804,026
Total	$	5,997,105	$	5,804,026

As of September 30, 2013 and December 31, 2012, no corporate loans carried at estimated fair value were pledged as collateral for the Company’s borrowings.

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Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities
Net income	$ 224,354	$ 271,217
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized and unrealized loss on derivatives and foreign exchange	5,012	2,583
Net loss on restructuring and extinguishment of debt	20,269	445
Write-off of debt issuance costs	6,014	1,381
Lower of cost or estimated fair value adjustment on corporate loans held for sale	11,442	(1,294)
Provision for loan losses	20,407	46,498
Impairment charges	17,496	12,067
Share-based compensation	2,842	2,258
Net realized and unrealized gain on residential mortgage-backed securities, at estimated fair value	(9,748)	(9,687)
Net realized and unrealized gain on investments	(144,587)	(161,874)
Depreciation and net amortization	(2,771)	(44,018)
Changes in assets and liabilities:
Interest receivable	4,960	12,249
Other assets	(33,574)	(17,997)
Related party payable	(7,151)	10,674
Accounts payable, accrued expenses and other liabilities	(5,113)	6,400
Net cash provided by operating activities	103,332	123,750
Cash flows from investing activities
Principal payments from corporate loans	1,243,853	1,462,505
Principal payments from securities available-for-sale and other securities, at estimated fair value	101,807	59,078
Principal payments from residential mortgage-backed securities, at estimated fair value	11,737	5,875
Proceeds from sales of corporate loans	210,280	304,946
Proceeds from sales of securities available-for-sale and other securities, at estimated fair value	30,584	448,165
Proceeds from equity and other investments	98,621	15,290
Proceeds from securities sold, not yet purchased	4,218	26,792
Purchases of corporate loans	(1,555,087)	(1,095,851)
Purchases of securities available-for-sale and other securities, at estimated fair value	(115,959)	(95,008)
Purchases of equity and other investments	(344,018)	(283,751)
Cover securities sold, not yet purchased	(2,928)	(8,222)
Net change in proceeds, purchases, and settlements of derivatives	(7,856)	(7,150)
Net change in restricted cash and cash equivalents	386,708	(335,479)
Net cash provided by investing activities	61,960	497,190
Cash flows from financing activities
Issuance of collateralized loan obligation secured notes	449,002	92,607
Retirement of collateralized loan obligation secured notes	(774,302)	(702,789)
Proceeds from credit facilities	2,400	69,489
Repayment of credit facilities	(61,700)
Repayment of convertible senior notes		(135,531)
Net proceeds from senior notes		111,418
Net proceeds from issuance of preferred shares	361,622
Distributions on common shares	(139,253)	(115,967)
Distributions on preferred shares	(13,629)
Repurchase and cancellation of common shares		(96)
Other capitalized costs	(5,052)	(859)
Net cash used in financing activities	(180,912)	(681,728)
Net decrease in cash and cash equivalents	(15,620)	(60,788)
Cash and cash equivalents at beginning of period	237,606	392,154
Cash and cash equivalents at end of period	221,986	331,366
Supplemental cash flow information
Cash paid for interest	121,170	143,882
Net cash paid for income taxes	7,618	106
Non-cash investing and financing activities
Issuance of restricted common shares	3,282	2,849
Loans transferred from held for investment to held for sale	316,003	86,969
Loans transferred from held for sale to held for investment		114,871
Conversion of convertible senior notes to common shares	186,254
Distributions declared | Nonredeemable preferred shares
Non-cash investing and financing activities
Preferred share distributions declared, not yet paid	6,891
Affiliates
Changes in assets and liabilities:
Accrued interest payable	(2,498)	295
Nonaffiliates
Changes in assets and liabilities:
Accrued interest payable	$ (4,022)	$ (7,447)

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 11) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Corporate loans and corporate loans held for sale
Amortized cost of corporate loans held for investment and corporate loans held for sale pledged as collateral
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$ 5,997,105	$ 5,804,026
Total loans pledged as collateral	5,997,105	5,804,026
Corporate loans at estimated fair value
Amortized cost of corporate loans held for investment and corporate loans held for sale pledged as collateral
Total loans pledged as collateral	$ 0	$ 0

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CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 6) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Recorded investment in impaired loans and related allowances for credit losses
Recorded investment with nonaccrual status	$ 618,808,000		$ 618,808,000		$ 536,277,000
Interest income recognized using cash basis method	5,500,000	8,400,000	20,900,000	15,100,000
Recorded investment of corporate loans in default	215,700,000		215,700,000		50,400,000
Past due interest payments of amortized cost of non-accrual and past due loans
Loans carried at estimated fair value	156,595,000		156,595,000		35,879,000
Corporate Loan Held for Investment
Recorded investment in impaired loans and related allowances for credit losses
Recorded investment with nonaccrual status	554,541,000		554,541,000		445,437,000
Interest income recognized using cash basis method	4,500,000	4,000,000	14,700,000	5,800,000
Recorded investment of corporate loans in default	203,700,000		203,700,000
Number of issuers past due	2	0	2	0
Past due interest payments of amortized cost of non-accrual and past due loans
Total past due interest payment	2,500,000		2,500,000
Less than 30 days past due	400,000		400,000
30-59 days past due	800,000		800,000
60-89 days past due	700,000		700,000
90 or more days past due	600,000		600,000
Corporate Loans Held for Sale
Recorded investment in impaired loans and related allowances for credit losses
Recorded investment with nonaccrual status	51,076,000		51,076,000		90,840,000
Interest income recognized using cash basis method	1,000,000	4,400,000	6,200,000	9,300,000
Corporate Loans, at Estimated Fair Value
Recorded investment in impaired loans and related allowances for credit losses
Recorded investment with nonaccrual status	13,191,000		13,191,000
Recorded investment of corporate loans in default	12,000,000		12,000,000
Number of issuers past due	1		1
Past due interest payments of amortized cost of non-accrual and past due loans
Par amount of non-accrual and past due loans	15,500,000		15,500,000
Loans carried at estimated fair value	11,400,000		11,400,000
Corporate Loans, at Estimated Fair Value | Maximum
Past due interest payments of amortized cost of non-accrual and past due loans
90 or more days past due	$ 100,000		$ 100,000

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

9 Months Ended

Sep. 30, 2013

FAIR VALUE OF FINANCIAL INSTRUMENTS

Schedule of carrying value and estimated fair value, as well as the respective hierarchy classifications, of the financial assets and liabilities that are not carried at estimated fair value

The following table presents the carrying value and estimated fair value, as well as the respective hierarchy classifications, of the Company’s financial assets and liabilities that are not carried at estimated fair value on a recurring basis as of September 30, 2013 (amounts in thousands):

	As of September 30, 2013				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash, restricted cash, and cash equivalents	$	731,674	$	731,674	$	731,674	$	—	$	—
Corporate loans, net of allowance for loan losses of $212,594 as of September 30, 2013(1)	5,684,165		5,738,480		—		5,319,139		419,341
Corporate loans held for sale(1)	312,312		313,605		—		300,178		13,427
Private equity investments, at cost(2)	405		2,621		—		—		2,621
Other assets	11,083		11,378		—		11,378		—
Liabilities:
Collateralized loan obligation secured debt	$	4,903,438	$	4,832,415	$	—	$	—	$	4,832,415
Collateralized loan obligation junior secured notes to affiliates	193,921		171,175		—		—		171,175
Credit facilities	48,489		48,489		—		—		48,489
Senior notes	362,251		394,508		394,508		—		—
Junior subordinated notes	283,517		138,073		—		—		138,073

(1) Corporate loans held for investment are carried at amortized cost net of allowance for loan losses, while corporate loans held for sale are carried at the lower of cost or estimated fair value. Refer to “Fair Value Measurements” for a table presenting the corporate loans which are measured at fair value on a non-recurring basis.

(2) Included within other assets on the condensed consolidated balance sheets.

The following table presents the carrying value and estimated fair value, as well as the respective hierarchy classifications, of the Company’s financial assets and liabilities that are not carried at estimated fair value on a recurring basis as of December 31, 2012 (amounts in thousands):

	As of December 31, 2012				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash, restricted cash, and cash equivalents	$	1,134,002	$	1,134,002	$	1,134,002	$	—	$	—
Corporate loans, net of allowance for loan losses of $223,472 as of December 31, 2012	5,783,689		5,831,218		—		5,203,763		627,455
Corporate loans held for sale(1)	128,289		195,078		—		151,327		43,751
Private equity investments, at cost(2)	405		1,635		—		—		1,635
Other assets	17,148		16,777		—		16,439		338
Liabilities:
Collateralized loan obligation secured debt	$	5,122,338	$	5,020,115	$	—	$	—	$	5,020,115
Collateralized loan obligation junior secured notes to affiliates	296,557		290,948		—		—		290,948
Credit facilities	107,789		107,789		—		—		107,789
Convertible senior notes	166,028		268,238		—		268,238		—
Senior notes	362,178		412,126		412,126		—		—
Junior subordinated notes	283,517		134,351		—		—		134,351

(1) Corporate loans held for sale are carried at the lower of cost or estimated fair value. Refer to “Fair Value Measurements” below for a table presenting the corporate loans held for sale which are measured at fair value on a non-recurring basis.

(2) Included within other assets on the condensed consolidated balance sheets.

Schedule of fair value of financial assets and liabilities measured on a recurring basis

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2013
Assets:
Securities:
Securities available-for-sale	$	—	$	329,425	$	38,951	$	368,376
Other securities, at estimated fair value	—		35,711		36,202		71,913
Residential mortgage-backed securities	—		—		79,386		79,386
Total securities	—		365,136		154,539		519,675
Corporate loans, at estimated fair value	—		72,114		84,481		156,595
Equity investments, at estimated fair value	46,753		33,746		110,654		191,153
Derivatives:
Foreign exchange options	—		—		8,420		8,420
Commodity swaps	—		7,464		—		7,464
Common stock warrants	2,455		—		2,086		4,541
Interest rate swaps	—		2,294		—		2,294
Foreign exchange forward contracts	—		3,016		—		3,016
Credit default swaps—protection purchased	—		4		—		4
Total rate of return swaps	—		729		—		729
Options	—		—		8,880		8,880
Total derivatives	2,455		13,507		19,386		35,348
Other assets:
Interests in joint ventures and partnerships	—		—		332,921		332,921
Other assets	—		534		—		534
Total other assets	—		534		332,921		333,455
Total	$	49,208	$	485,037	$	701,981	$	1,236,226
Liabilities:
Securities sold, not yet purchased	2,662		—		—		2,662
Derivatives:
Interest rate swaps	—		54,626		—		54,626
Foreign exchange forward contracts	—		26,190		—		26,190
Credit default swaps—protection purchased	—		1,669		—		1,669
Commodity swaps	—		3,134		—		3,134
Foreign exchange options	—		—		489		489
Total derivatives	—		85,619		489		86,108
Total	$	2,662	$	85,619	$	489	$	88,770

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2012
Assets:
Securities:
Corporate debt securities	$	—	$	370,072	$	42,221	$	412,293
Other securities, at estimated fair value	—		34,476		2,909		37,385
Residential mortgage-backed securities	—		—		83,842		83,842
Total securities	—		404,548		128,972		533,520
Corporate loans, at estimated fair value	—		19,738		16,141		35,879
Equity investments, at estimated fair value	23,790		40,085		97,746		161,621
Derivatives:
Foreign exchange options	—		—		8,562		8,562
Commodity swaps	—		8,557		—		8,557
Common stock warrants	1,744		—		1,574		3,318
Foreign exchange forward contracts	—		2,615		—		2,615
Credit default swaps—protection sold	—		19		—		19
Credit default swaps—protection purchased	—		136		—		136
Total derivatives	1,744		11,327		10,136		23,207
Other assets:
Interests in joint ventures and partnerships	—		—		142,477		142,477
Other assets	—		319		—		319
Total other assets	—		319		142,477		142,796
Total	$	25,534	$	476,017	$	395,472	$	897,023
Liabilities:
Securities sold, not yet purchased	$	1,158	$	—	$	—	$	1,158
Derivatives:
Interest rate swaps	—		90,618		—		90,618
Foreign exchange forward contracts	—		23,590		—		23,590
Credit default swaps—protection purchased	—		1,276		—		1,276
Commodity swaps	—		1,501		—		1,501
Foreign exchange options	—		—		285		285
Total derivatives	—		116,985		285		117,270
Total	$	1,158	$	116,985	$	285	$	118,428

Schedule of fair value of assets measured on a non-recurring basis

The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of September 30, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands). There were no liabilities measured at fair value on a non-recurring basis:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2013
Corporate loans held for sale(1)	$	—	$	167,950	$	5,120	$	173,070
Total	$	—	$	167,950	$	5,120	$	173,070

(1) As of September 30, 2013, total loans held for sale had a carrying value of $312.3 million of which $173.1 million was carried at estimated fair value and the remaining $139.2 million carried at amortized cost.

The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands). There were no liabilities measured at fair value on a non-recurring basis:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2012
Corporate loans held for sale(1)	$	—	$	49,521	$	24,347	$	73,868
Total	$	—	$	49,521	$	24,347	$	73,868

(1) As of December 31, 2012, total loans held for sale had a carrying value of $128.3 million of which $73.9 million was carried at estimated fair value and the remaining $54.4 million carried at amortized cost.

Schedule of additional information of assets measured on level 3 basis

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the three months ended September 30, 2013 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities		Other Securities, at Estimated Fair Value			Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value			Options		Common Stock Warrants			Foreign Exchange Options, Net		Interests in Joint Ventures and Partnerships
Beginning balance as of July 1, 2013	$	37,380	$	27,872		$	82,973		$	45,936	$	100,294		$	—	$	3,561		$	5,751	$	235,024
Total gains or losses (for the period):
Included in earnings(1)	297		1,384			1,747			497		5,558			90		(1,475		)	2,180		3,739
Included in other comprehensive income	338		—			—			—		—			—		—			—		—
Transfers into Level 3(2)	—		—			—			—		—			—		—			—		—
Transfers out of Level 3(2)	—		—			—			—		—			—		—			—		—
Purchases	—		8,100			—			37,959		5,000			8,790		—			—		132,198
Sales	—		—			—			—		(198		)	—		—			—		—
Settlements	936		(1,154		)	(5,334		)	89		—			—		—			—		(38,040		)
Ending balance as of September 30, 2013	$	38,951	$	36,202		$	79,386		$	84,841	$	110,654		$	8,880	$	2,086		$	7,931	$	332,921
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	297	$	1,384		$	5,868		$	497	$	5,857		$	90	$	(1,475	)	$	2,180	$	3,739

(1) Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations.

(2) There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized level 3 inputs to determine fair value, for the nine months ended September 30, 2013 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value			Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value			Equity Investments, at Estimated Fair Value			Options		Common Stock Warrants		Foreign Exchange Options, Net			Interests in Joint Ventures and Partnerships
Beginning balance as of January 1, 2013	$	42,221		$	2,909		$	83,842		$	16,141		$	97,746		$	—	$	1,574	$	8,277		$	142,477
Total gains or losses (for the period):
Included in earnings(1)	279			2,656			7,301			(555		)	8,648			90		512		(346		)	7,646
Included in other comprehensive income	559			—			—			—			—			—		—		—			—
Transfers into Level 3(2)	—			—			—			—			—			—		—		—			—
Transfers out of Level 3(2)	—			—			—			—			—			—		—		—			—
Purchases	—			31,791			—			69,727			5,003			8,790		—		—			229,862
Sales	—			—			—			—			(198		)	—		—		—			—
Settlements	(4,108		)	(1,154		)	(11,757		)	(832		)	(545		)	—		—		—			(47,064		)
Ending balance as of September 30, 2013	$	38,951		$	36,202		$	79,386		$	84,481		$	110,654		$	8,880	$	2,086	$	7,931		$	332,291
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	279		$	2,656		$	21,565		$	(851	)	$	8,947		$	90	$	513	$	(346	)	$	7,646

(1) Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations.

(2) There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the three months ended September 30, 2012 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value		Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value		Total Rate of Return Swaps		Common Stock Warrants		Foreign Exchange Options, Net			Interests in Joint Ventures and Partnerships			Other Assets
Beginning balance as of July 1, 2012	$	68,101		$	3,104	$	87,935		$	12,831	$	122,736	$	—	$	1,864	$	8,254		$	98,101		$	—
Total gains or losses (for the period):
Included in earnings(1)	573			252		2,764			264		8,996		—		503		(920		)	3,233			—
Included in other comprehensive loss	6,058			—		—			—		—		—		—		—			—			—
Transfers into Level 3(2)	—			—		—			—		—		—		—		—			—			—
Transfers out of Level 3(2)	—			—		—			—		—		—		—		—			—			—
Purchases	—			—		—			1,650		1,913		—		—		—			11,967			—
Sales	(20,000		)	—		—			—		—		—		—		—			—			—
Settlements	(10,002		)	—		(3,829		)	196		—		—		—		—			(281		)	—
Ending balance as of September 30, 2012	$	44,730		$	3,356	$	86,870		$	14,941	$	133,645	$	—	$	2,367	$	7,334		$	113,020		$	—
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	200		$	252	$	9,073		$	264	$	8,996	$	—	$	503	$	(920	)	$	3,233		$	—

(1) Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations.

(2) There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the nine months ended September 30, 2012 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value		Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value			Total Rate of Return Swaps			Common Stock Warrants		Foreign Exchange Options, Net			Interests in Joint Ventures and Partnerships			Other Assets
Beginning balance as of January 1, 2012	$	67,233		$	2,778	$	86,479		$	—	$	150,962		$	152		$	1,266	13,394			$	—		$	567
Total gains or losses (for the period):
Included in earnings(1)	1,026			578		7,498			1,017		13,214			141			1,101		(6,060		)	751			342
Included in other comprehensive loss	12,026			—		—			—		—			—			—		—			—			—
Transfers into Level 3(2)	—			—		—			—		—			—			—		—			34,230			—
Transfers out of Level 3(2)	—			—		—			—		(34,230		)	—			—		—			—			—
Purchases	—			—		—			13,494		8,064			—			—		—			78,508			—
Sales	(24,660		)	—		—			—		(4,365		)	—			—		—			—			(706		)
Settlements	(10,895		)	—		(7,107		)	430		—			(293		)	—		—			(469		)	(203		)
Ending balance as of September 30, 2012	$	44,730		$	3,356	$	86,870		$	14,941	$	133,645		$	—		$	2,367	$	7,334		$	113,020		$	—
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	417		$	578	$	24,228		$	1,017	$	10,211		$	—		$	1,101	$	(6,060	)	$	751		$	—

(1) Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign in the condensed consolidated statements of operations.

(2) There were no transfers between Level 1 or 2. The transfers into and out of Level 3 represented the reclassification of certain assets from equity investments, at estimated fair value to interests in joint ventures and partnerships. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

Summary of valuation techniques used for assets and liabilities, measured at fair value and categorized within level 3

The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivatives, that are measured at fair value and categorized within Level 3 as of September 30, 2013 (dollar amounts in thousands):

	Balance as of September 30, 2013		Valuation Techniques(1)	Unobservable Inputs(2)	Range (Weighted Average)(3)	Impact to Valuation from an Increase in Input(4)
Assets:
Securities available-for-sale: Corporate debt securities	$	38,951	Yield Analysis	Yield	12% - 14% (13%)	Decrease
				Net leverage	6x - 7x (6x)	Decrease
				EBITDA multiple	8x - 9x (9x)	Increase
			Broker quotes	Offered quotes	70 - 105 (101)	Increase
Other securities, at estimated fair value	$	36,202	Yield Analysis	Yield	9% - 12% (11%)	Decrease
				EBITDA multiple	7x (7x)	Increase
				Illiquidity discount	5% (5%)	Decrease
Residential mortgage-backed securities	$	79,386	Discounted cash flows	Probability of default Loss severity	0% - 41% (10%) 12% - 78% (26%)	Decrease Decrease
				Constant prepayment rate	3% - 33% (16%)		(5)
Corporate loans, at estimated fair value	$	84,481	Yield Analysis	Yield Discount margin	11% - 16% (16%) 900bps-1500bps	Decrease Decrease
					(1450bps)
				Illiquidity discount	10% (10%)	Decrease
				Net leverage	5x - 15x (7x)	Decrease
				EBITDA multiple	8x - 9x (9x)	Increase
			Broker quotes	Offered quotes	11 - 38 (38)	Increase
Equity investments, at estimated fair value (6)	$	110,654	Market comparables	LTM EBITDA multiple	6x - 15x (12x)	Increase
				Forward EBITDA multiple	9x - 13x (11x)	Increase
				Illiquidity discount	5% - 15% (9%)	Decrease
			Discounted cash flows	Weighted average cost of capital	8% - 14% (11%)	Decrease
				LTM EBITDA exit multiple	7x - 11x (9x)	Increase
Common stock warrants	$	2,086	Market comparables	LTM EBITDA multiple	7x - 8x (8x)	Increase
Foreign exchange options	$	8,420	Option pricing model	Forward and spot rates	0 - 1 (1)		(7)
Interests in joint ventures and partnerships	$	332,921	Discounted cash flows	Illiquidity discount	10% - 15% (12%)	Decrease
				Weighted average cost of capital	10% - 27% (13%)	Decrease
Options	$	8,880	—	—	—		(8)
Liabilities:
Foreign exchange options	$	489	Option pricing model	Forward and spot rates	0.02 (0.02)		(7)

(1) For the assets that have more than one valuation technique, the Company may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. When determining the weighting ascribed to each valuation methodology, the Company considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among the investments and in certain instances, may result in up to a 100% weighting to a single methodology. Broker quotes obtained for valuation purposes are reviewed by the Company through other valuation techniques.

(2) The significant unobservable inputs used in the fair value measurement of the Company’s assets and liabilities may include the last twelve months (“LTM”) EBITDA multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a variety of factors including economic, industry and market trends and developments; market valuations of comparable companies; and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement.

(3) Weighted average amounts are based on the estimated fair values.

(4) Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

(5) The impact of changes in prepayment speeds may have differing impacts depending on the seniority of the instrument. Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6) When determining the illiquidity discount to be applied, the Company takes a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments carried at estimated fair value. The Company then evaluates such investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include the salability of the investment, whether the issuer is undergoing significant restructuring activity or similar factors, as well as characteristics about the issuer including its size and/or whether it is experiencing, or expected to experience, a significant decline in earnings. Depending on the applicability of these factors, the Company determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time the Company holds the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by the Company in its valuations.

(7) The directional change from an increase in forward and spot rates varies and is dependent on the specific option.

(8) Options were purchased on September 25, 2013 and as such, the cost approximated fair value.

The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivatives, that are measured at fair value and categorized within Level 3 as of December 31, 2012 (dollar amounts in thousands):

	Balance as of December 31, 2012		Valuation Techniques(1)	Unobservable Inputs(2)	Range (Weighted Average)(3)	Impact to Valuation from an Increase in Input(4)
Assets:
Securities available-for-sale: Corporate debt securities	$	42,221	Yield Analysis	Yield Discount margin	11% - 46% (16%) 1100bps - 4550bps	Decrease Decrease
					(1450bps)
				Net leverage	3x - 13x (6x)	Decrease
				Illiquidity discount	3% (3%)	Decrease
				EBITDA multiple	6x - 8x (7x)	Increase
			Broker quotes	Offered quotes	69 - 105 (88)	Increase
Other securities, at estimated fair value	$	2,909	Yield Analysis	Yield	10% (10%)	Decrease
Residential mortgage-backed securities	$	83,842	Discounted cash flows	Probability of default Loss severity	0% - 21% (6%) 18% - 80% (30%)	Decrease Decrease
				Constant prepayment rate	1% - 35% (13%)		(5)
Corporate loans, at estimated fair value	$	16,141	Yield Analysis	Illiquidity discount Net leverage	15% (15%) 8x - 9x (9x)	Decrease Decrease
				EBITDA multiple	9x - 10x (10x)	Increase
			Broker quotes	Offered quotes	8 - 40 (39)	Increase
Equity investments, at estimated fair value (6)	$	97,746	Market comparables	LTM EBITDA multiple	7x - 12x (10x)	Increase
				Forward EBITDA multiple	6x - 12x (10x)	Increase
			Discounted cash flows	Weighted average cost of capital	6% - 16% (10%)	Decrease
				LTM EBITDA exit multiple	7x - 12x (9x)	Increase
Common stock warrants	$	1,574	Market comparables	LTM EBITDA multiple	7x (7x)	Increase
				Forward EBITDA multiple	7x (7x)	Increase
				Illiquidity discount	15% (15%)	Decrease
			Discounted cash flows	Weighted average cost of capital	12% (12%)	Decrease
				LTM EBITDA exit multiple	7x (7x)	Increase
Foreign exchange options	$	8,562	Option pricing model	Forward and spot rates	0 - 2 (1)		(7)
Interests in joint ventures and partnerships	$	142,477	Discounted cash flows	Illiquidity discount	10% - 15% (10%)	Decrease
				Weighted average cost of capital	13% - 30% (18%)	Decrease
Liabilities:
Foreign exchange options	$	285	Option pricing model	Forward and spot rates	0.02 (0.02)		(7)

(1) For the assets that have more than one valuation technique, the Company may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. When determining the weighting ascribed to each valuation methodology, the Company considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among the investments and in certain instances, may result in up to a 100% weighting to a single methodology. Broker quotes obtained for valuation purposes are reviewed by the Company through other valuation techniques.

(2) The significant unobservable inputs used in the fair value measurement of the Company’s assets and liabilities may include the last twelve months (“LTM”) EBITDA multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a variety of factors including economic, industry and market trends and developments; market valuations of comparable companies; and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement.

(3) Weighted average amounts are based on the estimated fair values.

(4) Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

(5) The impact of changes in prepayment speeds may have differing impacts depending on the seniority of the instrument. Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6) When determining the illiquidity discount to be applied, the Company takes a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments carried at estimated fair value. The Company then evaluates such investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include the salability of the investment, whether the issuer is undergoing significant restructuring activity or similar factors, as well as characteristics about the issuer including its size and/or whether it is experiencing, or expected to experience, a significant decline in earnings. Depending on the applicability of these factors, the Company determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time the Company holds the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by the Company in its valuations.

(7) The directional change from an increase in forward and spot rates varies and is dependent on the specific option.

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SHAREHOLDERS' EQUITY (Details) (USD $)	9 Months Ended		0 Months Ended	9 Months Ended			0 Months Ended	9 Months Ended		9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Jan. 17, 2013 Series A LLC Preferred Shares	Sep. 30, 2013 Series A LLC Preferred Shares	Sep. 30, 2013 Restricted common shares	Sep. 30, 2012 Restricted common shares	Feb. 14, 2013 Restricted common shares Manager	Sep. 30, 2013 Restricted common shares Manager	Sep. 30, 2012 Restricted common shares Manager	Sep. 30, 2013 Restricted common shares Directors	Sep. 30, 2013 Common share options	Sep. 30, 2013 Common share options Maximum
Stock-based compensation
Preferred shares, shares issued	14,950,000	0	14,950,000
Gross proceeds from issue of preferred shares (in dollars)			$ 373,800,000
Net proceeds from issuance of preferred stock (in dollars)	361,622,000		362,000,000
Preferred shares, dividend rate (as a percent)			7.375%	7.375%
Exercise price of share options granted, minimum (as a percent)											100.00%
Termination period from date of grant												10 years
Authorized shares available to satisfy awards as of the balance sheet date											8,839,625
Vesting period							3 years
Restricted common share transactions
Unvested shares at the beginning of the period					531,190			438,937		92,253
Issued (in shares)					331,297		292,009	292,009		39,288
Vested (in shares)					(192,659)			(146,312)		(46,347)
Unvested shares at the end of the period					669,828			584,634		85,194
Value of unvested restricted common shares granted (in dollars per share)								$ 10.33	$ 10.05
Unrecognized compensation cost (in dollars)					$ 3,900,000	$ 3,500,000

XML

BORROWINGS (Details 5) (USD $)	9 Months Ended	0 Months Ended
	Sep. 30, 2012	Mar. 20, 2012 7 500% Senior notes due March 20, 2042
Details of Company's borrowings
Aggregate principal amount of the notes		$ 115,000,000
Interest rate (as a percent)		7.50%
Total net proceeds from senior notes	$ 111,418,000	$ 111,400,000

XML

MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS

9 Months Ended

Sep. 30, 2013

MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS

MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS

NOTE 12. MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS

The Manager manages the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors. The Management Agreement expires on December 31 of each year, but is automatically renewed for a one-year term each December 31 unless terminated upon the affirmative vote of at least two-thirds of the Company’s independent directors, or by a vote of the holders of a majority of the Company’s outstanding common shares, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable by the Manager is not fair, subject to the Manager’s right to prevent such a termination under this clause (2) by accepting a mutually acceptable reduction of management fees. The Manager must be provided 180 days prior notice of any such termination and will be paid a termination fee equal to four times the sum of the average annual base management fee and the average annual incentive fee for the two 12-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

The Management Agreement contains certain provisions requiring the Company to indemnify the Manager with respect to all losses or damages arising from acts not constituting bad faith, willful misconduct, or gross negligence. The Company has evaluated the impact of these guarantees on its condensed consolidated financial statements and determined that they are not material.

The following table summarizes the components of related party management compensation on the Company’s condensed consolidated statement of operations, which are described in further detail below, for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Base management fees, net	$	4,314	$	6,911	$	23,500	$	21,075
CLO management fees	5,916		1,145		8,429		3,372
Incentive fees	—		17,768		22,742		31,495
Manager share-based compensation	690		778		2,073		1,577
Total related party management compensation	$	10,920	$	26,602	$	56,744	$	57,519

Base Management Fees

The Company pays its Manager a base management fee monthly in arrears. During the three and nine months ended September 30, 2013, certain related party fees received by affiliates of the Manager were credited to the Company via an offset to the base management fee (“Fee Credits”). Specifically, as described in further detail under “CLO Management Fees” below, a portion of the CLO management fees received by an affiliate of the Manager for certain of the Company’s CLOs were credited to the Company via an offset to the base management fee. For some of these CLOs, the Company holds less than 100% of the subordinated notes, with the remainder held by third parties. As a result, the amount of Fee Credits for each applicable CLO was calculated by taking the product of (x) the total CLO management fees received by an affiliate of the Manager during the period for such CLO multiplied by (y) the percentage of the subordinated notes of such CLO held by the Company. The remaining portion of the CLO management fees paid by each of these CLOs was not credited to the Company, but instead resulted in a dollar-for-dollar reduction in the interest expense paid by the Company to the third party holder of the CLO’s subordinated notes.

In addition, during the third quarter of 2013, the Company invested in a transaction that generated placement fees paid to a minority-owned affiliate of KKR. In connection with this transaction, the Manager agreed to reduce the Company’s base management fee payable to the Manager for the portion of these placement fees that were earned by KKR as a result of this minority-ownership.

The table below summarizes the aggregate base management fees for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013			For the three months ended September 30, 2012		For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Base management fees, gross	$	9,799		$	6,911	$	29,216		$	21,075
CLO management fees credit (1)	(3,684		)	—		(3,915		)	—
Other related party fees credit	(1,801		)	—		(1,801		)	—
Total base management fees, net	$	4,314		$	6,911	$	23,500		$	21,075

(1) See “CLO Management Fees” for further discussion.

The Manager is waiving base management fees related to the $230.4 million common share offering and $270.0 million common share rights offering that occurred during the third quarter of 2007 until such time as the Company’s common share closing price on the NYSE is $20.00 or more for five consecutive trading days. Accordingly, the Manager permanently waived approximately $2.2 million of base management fees during each of the three months ended September 30, 2013 and 2012 and $6.6 million during each of the nine months ended September 30, 2013 and 2012.

CLO Management Fees

An affiliate of the Manager entered into separate management agreements with the respective investment vehicles for all of the Company’s Cash Flow CLOs and is entitled to receive fees for the services performed as collateral manager for all of these CLOs, except for CLO 2011-1. The collateral manager has the option to waive the fees it earns for providing management services for the CLO.

Fees Waived

During the three and nine months ended September 30, 2013, the collateral manager waived CLO management fees totaling $3.0 million and $18.0 million, respectively, for all CLOs, except CLO 2005-1, CLO 2007-1 and CLO 2012-1. During the three and nine months ended September 30, 2012, the collateral manager waived aggregate CLO management fees of $8.0 million and $24.4 million, respectively, for all CLOs, except for CLO 2005-1.

Fees Charged and Fee Credits

The Company recorded management fees expense for CLO 2005-1, CLO 2007-1 and CLO 2012-1 for the three and nine months ended September 30, 2013. The Company recorded management fees expense for CLO 2005-1 for the three and nine months ended September 30, 2012.

During the three and nine months ended September 30, 2013, the Manager agreed to credit the Company for a portion of the CLO management fees received by an affiliate of the Manager from CLO 2007-1 and CLO 2012-1 via an offset to the monthly base management fees payable to the Manager. As the Company owns less than 100% of the subordinated notes of these two CLOs (with the remaining subordinated notes held by third parties), the Company received a Fee Credit equal only to the Company’s pro rata share of the aggregate CLO management fees paid by these CLOs. Specifically, the amount of the reimbursement for each of these CLOs was calculated by taking the product of (x) the total CLO management fees received by an affiliate of the Manager during the period for such CLO multiplied by (y) the percentage of the subordinated notes of such CLO held by the Company. The remaining portion of the CLO management fees paid by each of these CLOs was not credited to the Company, but instead resulted in a dollar-for-dollar reduction in the interest expense paid by the Company to the third party holder of the CLO’s subordinated notes. Effective October 2013, a portion of CLO management fees received by the Manager from CLO 2007-A will also reduce the base management fees payable by the Company in the same manner described above.

The table below summarizes the aggregate CLO management fees, including the Fee Credits, for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three months ended September 30, 2013		For the three months ended September 30, 2012		For the nine months ended September 30, 2013		For the nine months ended September 30, 2012
Charged and retained CLO management fees (1)	$	2,232	$	1,145	$	4,514	$	3,372
CLO management fees credit	3,684		—		3,915		—
Total CLO management fees	$	5,916	$	1,145	$	8,429	$	3,372

(1) Represents management fees incurred by the senior and subordinated note holders of a CLO, excluding the Fee Credits received by the Company based on its ownership percentage in the CLO.

Subordinated note holders in CLOs have the first risk of loss and conversely, the residual value upside of the transactions. When CLO management fees are paid by a CLO, the residual economic interests in the CLO transaction are reduced by an amount commensurate with the CLO management fees paid. The Company records any residual proceeds due to subordinated note holders as interest expense on the condensed consolidated statements of operations. Accordingly, the increase in CLO management fees is directly offset by a decrease in interest expense.

Incentive Fees

During the three and nine months ended September 30, 2013, the Manager earned zero and $22.7 million, respectively, of incentive fees. As of September 30, 2013, the Company had no incentive fee payable to the Manager. During the three and nine months ended September 30, 2012, the Manager earned $17.8 million and $31.5 million, respectively, of incentive fees.

Manager Share-Based Compensation

The Company recognized share-based compensation expense related to restricted common shares granted to the Manager of $0.7 million and $2.1 million, for the three and nine months ended September 30, 2013, respectively. The Company recognized share-based compensation expense related to restricted common shares granted to the Manager of $0.8 million and $1.6 million, for the three and nine months ended September 30, 2012, respectively. Refer to Note 11 to these condensed consolidated financial statements for further discussion on share-based compensation.

Reimbursable General and Administrative Expenses

Certain general and administrative expenses are incurred by the Company’s Manager on its behalf that are reimbursable to the Manager pursuant to the Management Agreement. During the three and nine months ended September 30, 2013, the Company incurred reimbursable general and administrative expenses to its Manager of $2.3 million and $5.9 million, respectively, as compared to $1.9 million and $5.8 million during the three and nine months ended September 30 2012, respectively. Expenses incurred by the Manager and reimbursed by the Company are reflected in general, administrative and directors expenses on the condensed consolidated statements of operations.

Affiliated Investments

The Company has invested in corporate loans, debt securities and other investments of entities that are affiliates of KKR. As of September 30, 2013, the aggregate par amount of these affiliated investments totaled $2.0 billion, or approximately 26% of the total investment portfolio, and consisted of 28 issuers. The total $2.0 billion in affiliated investments was comprised of $1.9 billion of corporate loans, $52.8 million of corporate debt securities and $84.3 million of equity investments, at estimated fair value. As of December 31, 2012, the aggregate par amount of these affiliated investments totaled $2.1 billion, or approximately 29% of the total investment portfolio, and consisted of 32 issuers. The total $2.1 billion in affiliated investments was comprised of $2.0 billion of corporate loans, $39.3 million of corporate debt securities and $73.8 million of equity investments, at estimated fair value.

In addition, the Company has invested in certain joint ventures and partnerships alongside KKR and its affiliates. As of September 30, 2013 and December 31, 2012, the aggregate cost amount of these interests in joint ventures and partnerships, which are included in other assets on the condensed consolidated balance sheets, totaled $319.0 million and $137.6 million, respectively.

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DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2013

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

NOTE 8. DERIVATIVE INSTRUMENTS

The Company enters into derivative transactions in order to hedge its interest rate risk exposure to the effects of interest rate changes. Additionally, the Company enters into derivative transactions in the course of its portfolio management activities. The counterparties to the Company’s derivative agreements are major financial institutions with which the Company and its affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, the Company is potentially exposed to losses. The counterparties to the Company’s derivative agreements have investment grade ratings and, as a result, the Company does not anticipate that any of the counterparties will fail to fulfill their obligations.

The table below summarizes the aggregate notional amount and estimated net fair value of the derivative instruments as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	As of September 30, 2013						As of December 31, 2012
	Notional			Estimated Fair Value			Notional			Estimated Fair Value
Cash Flow Hedges:
Interest rate swaps	$	485,833		$	(52,332	)	$	503,833		$	(90,618	)
Free-Standing Derivatives:
Commodity swaps	—			4,330			—			7,056
Credit default swaps—protection sold	—			—			—			19
Credit default swaps—protection purchased	(109,953		)	(1,665		)	(47,321		)	(1,140		)
Foreign exchange forward contracts	(293,457		)	(23,174		)	(338,313		)	(20,975		)
Foreign exchange options	130,207			7,931			130,207			8,277
Common stock warrants	—			4,541			—			3,318
Total rate of return swaps	—			729			—			—
Options	—			8,880			—			—
Total				$	(50,760	)				$	(94,063	)

Cash Flow Hedges

The Company uses interest rate swaps to hedge a portion of the interest rate risk associated with its borrowings under CLO senior secured notes as well as certain of its floating rate junior subordinated notes. The Company designates these interest rate swaps as cash flow hedges. As of September 30, 2013 and December 31, 2012, the Company had interest rate swaps with notional amounts totaling $485.8 million and $503.8 million, respectively. Changes in the estimated fair value of the interest rate swaps are recorded through accumulated other comprehensive loss, with gains or losses representing hedge ineffectiveness, if any, recognized in earnings during the reporting period.

The following table presents the net gains recognized in accumulated other comprehensive loss related to derivatives in cash flow hedging relationships for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	For the three monthsended September 30, 2013		For the three monthsendedSeptember 30, 2012		For the nine monthsended September 30, 2013		For the ninemonthsendedSeptember 30, 2012
Net gains recognized in accumulated other comprehensive loss on cash flow hedges	$	6,813	$	2,767	$	38,211	$	1,580

For all hedges where hedge accounting is being applied, effectiveness testing and other procedures to ensure the ongoing validity of the hedges are performed at least quarterly. During the three and nine months ended September 30, 2013 and 2012, the Company did not recognize any ineffectiveness in income on the condensed consolidated statements of operations from its cash flow hedges.

Free-Standing Derivatives

Free-standing derivatives are derivatives that the Company has entered into in conjunction with its investment and risk management activities, but for which the Company has not designated the derivative contract as a hedging instrument for accounting purposes. Such derivative contracts may include credit default swaps (“CDS”), foreign exchange contracts and options, interest rate swaps and commodity derivatives. Free-standing derivatives also include investment financing arrangements (total rate of return swaps) whereby the Company receives the sum of all interest, fees and any positive change in fair value amounts from a reference asset with a specified notional amount and pays interest on such notional amount plus any negative change in fair value amounts from such reference asset.

Gains and losses on free-standing derivatives are reported in net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations. Unrealized gains (losses) represent the change in fair value of the derivative instruments and are noncash items.

Commodity Derivatives

In an effort to minimize the effects of the volatility of oil, natural gas and NGL prices, the Company will from time to time enter into derivative instruments such as swap contracts to hedge its forecasted commodities sales. The Company does not designate these contracts as cash flow hedges and as such, the changes in fair value of these instruments are recorded in current period earnings.

The following table summarizes open positions as of September 30, 2013, and represents, as of such date, derivatives in place through December 31, 2016, on expected annual production volumes:

	2013		2014		2015		2016
Natural gas positions:
Fixed price swaps:
Hedged volume (MMMBtu)	1,691		5,821		4,277		1,805
Average price ($/MMBtu)	$	3.60	$	3.86	$	4.07	$	4.17
Natural gas liquid positions:
Fixed price swaps:
Hedged volume (MBbls)	48		145		—		—
Average price ($/Bbl)	$	32.05	$	27.89	$	—	$	—
Oil positions:
Fixed price swaps:
Hedged volume (MBbls)	114		626		253		—
Average price ($/Bbl)	$	101.58	$	95.05	$	89.18	$	—

Credit Default Swaps

A CDS is a contract in which the contract buyer pays, in the case of a short position, or receives, in the case of long position, a periodic premium until the contract expires or a credit event occurs. In return for this premium, the contract seller receives a payment from or makes a payment to the buyer if there is a credit default or other specified credit event with respect to the issuer (also known as the reference entity) of the underlying credit instrument referenced in the CDS. Typical credit events include bankruptcy, dissolution or insolvency of the reference entity, failure to pay and restructuring of the obligations of the reference entity.

As of September 30, 2013 and December 31, 2012, the Company had purchased protection with a notional amount of $110.0 million and $47.3 million, respectively. The Company sells or purchases protection to replicate fixed income securities and to complement the spot market when cash securities of the referenced entity of a particular maturity are not available or when the derivative alternative is less expensive compared to other purchasing alternatives. In addition, the Company may purchase protection to hedge economic exposure to declines in value of certain credit positions. The Company purchases its protection from banks and broker dealers, other financial institutions and other counterparties.

Foreign Exchange Derivatives

The Company holds certain positions that are denominated in a foreign currency, whereby movements in foreign currency exchange rates may impact earnings if the United States dollar significantly strengthens or weakens against foreign currencies. In an effort to minimize the effects of these fluctuations on earnings, the Company will from time to time enter into foreign exchange options or foreign exchange forward contracts related to the assets denominated in a foreign currency. As of September 30, 2013 and December 31, 2012, the net contractual notional balance of our foreign exchange options and forward contracts totaled $163.3 million and $208.1 million, respectively, all of which related to certain of our foreign currency denominated corporate debt holdings.

Free-Standing Derivatives Income (Loss)

The amounts recorded in net realized and unrealized gain (loss) on derivatives and foreign exchange on the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

	Three months ended September 30, 2013									Three months ended September 30, 2012
	Realized gains (losses)(1)			Unrealized gains (losses)			Total			Realized gains (losses)(1)			Unrealized gains (losses)			Total
Commodity swaps	$	(78	)	$	(3,645	)	$	(3,723	)	$	931		$	(6,738	)	$	(5,807	)
Credit default swaps	(365		)	(967		)	(1,332		)	(1,167		)	(4,385		)	(5,552		)
Foreign exchange forward contracts and options(2)	502			1,444			1,946			(1,361		)	3,884			2,523
Common stock warrants	—			(1,219		)	(1,219		)	—			734			734
Total rate of return swaps	447			729			1,176			—			—			—
Options	—			90			90			—			—			—
Net realized and unrealized gains (losses)	$	506		$	(3,568	)	$	(3,062	)	$	(1,597	)	$	(6,505	)	$	(8,102	)

(1) Includes related income and expense on the derivatives.

(2) Net of foreign exchange remeasurement gain or loss on foreign denominated assets.

	Nine months ended September 30, 2013									Nine months ended September 30, 2012
	Realized gains (losses)(1)			Unrealized gains (losses)			Total			Realized gains (losses)(1)			Unrealized gains (losses)			Total
Commodity swaps	$	1,008		$	(2,725	)	$	(1,717	)	$	3,590		$	(2,917	)	$	673
Credit default swaps	(3,526		)	552			(2,974		)	(5,764		)	2,497			(3,267		)
Foreign exchange forward contracts and options(2)	2,770			(4,929		)	(2,159		)	(396		)	(971		)	(1,367		)
Common stock warrants	—			540			540			—			1,237			1,237
Total rate of return swaps	447			729			1,176			141			—			141
Options	(91		)	213			122			—			—			—
Net realized and unrealized gains (losses)	$	608		$	(5,620	)	$	(5,012	)	$	(2,429	)	$	(154	)	$	(2,583	)

(1) Includes related income and expense on the derivatives.

(2) Net of foreign exchange remeasurement gain or loss on foreign denominated assets.

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SHAREHOLDERS' EQUITY (Details 3) (Restricted common shares, USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Stock-based compensation
Share-based compensation expense (in dollars)	$ 946	$ 1,012	$ 2,842	$ 2,258
Manager
Stock-based compensation
Share-based compensation expense (in dollars)	690	778	2,073	1,577
Directors
Stock-based compensation
Share-based compensation expense (in dollars)	$ 256	$ 234	$ 769	$ 681

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SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2013

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

NOTE 15. SUBSEQUENT EVENTS

On October 23, 2013, the Company’s board of directors declared a cash distribution for the quarter ended September 30, 2013 on the Company’s common shares of $0.22 per common share. The distribution is payable on November 20, 2013 to common shareholders of record as of the close of business on November 6, 2013.

On September 24, 2013, the Company’s board of directors declared a cash distribution of $0.460938 per share on its Series A LLC Preferred Shares. The distribution was paid on October 15, 2013 to preferred shareholders as of the close of business on October 8, 2013.

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FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2013

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Instruments Not Carried at Estimated Fair Value

The following table presents the carrying value and estimated fair value, as well as the respective hierarchy classifications, of the Company’s financial assets and liabilities that are not carried at estimated fair value on a recurring basis as of September 30, 2013 (amounts in thousands):

	As of September 30, 2013				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash, restricted cash, and cash equivalents	$	731,674	$	731,674	$	731,674	$	—	$	—
Corporate loans, net of allowance for loan losses of $212,594 as of September 30, 2013(1)	5,684,165		5,738,480		—		5,319,139		419,341
Corporate loans held for sale(1)	312,312		313,605		—		300,178		13,427
Private equity investments, at cost(2)	405		2,621		—		—		2,621
Other assets	11,083		11,378		—		11,378		—
Liabilities:
Collateralized loan obligation secured debt	$	4,903,438	$	4,832,415	$	—	$	—	$	4,832,415
Collateralized loan obligation junior secured notes to affiliates	193,921		171,175		—		—		171,175
Credit facilities	48,489		48,489		—		—		48,489
Senior notes	362,251		394,508		394,508		—		—
Junior subordinated notes	283,517		138,073		—		—		138,073

(1) Corporate loans held for investment are carried at amortized cost net of allowance for loan losses, while corporate loans held for sale are carried at the lower of cost or estimated fair value. Refer to “Fair Value Measurements” for a table presenting the corporate loans which are measured at fair value on a non-recurring basis.

(2) Included within other assets on the condensed consolidated balance sheets.

The following table presents the carrying value and estimated fair value, as well as the respective hierarchy classifications, of the Company’s financial assets and liabilities that are not carried at estimated fair value on a recurring basis as of December 31, 2012 (amounts in thousands):

	As of December 31, 2012				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash, restricted cash, and cash equivalents	$	1,134,002	$	1,134,002	$	1,134,002	$	—	$	—
Corporate loans, net of allowance for loan losses of $223,472 as of December 31, 2012	5,783,689		5,831,218		—		5,203,763		627,455
Corporate loans held for sale(1)	128,289		195,078		—		151,327		43,751
Private equity investments, at cost(2)	405		1,635		—		—		1,635
Other assets	17,148		16,777		—		16,439		338
Liabilities:
Collateralized loan obligation secured debt	$	5,122,338	$	5,020,115	$	—	$	—	$	5,020,115
Collateralized loan obligation junior secured notes to affiliates	296,557		290,948		—		—		290,948
Credit facilities	107,789		107,789		—		—		107,789
Convertible senior notes	166,028		268,238		—		268,238		—
Senior notes	362,178		412,126		412,126		—		—
Junior subordinated notes	283,517		134,351		—		—		134,351

(1) Corporate loans held for sale are carried at the lower of cost or estimated fair value. Refer to “Fair Value Measurements” below for a table presenting the corporate loans held for sale which are measured at fair value on a non-recurring basis.

(2) Included within other assets on the condensed consolidated balance sheets.

Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2013
Assets:
Securities:
Securities available-for-sale	$	—	$	329,425	$	38,951	$	368,376
Other securities, at estimated fair value	—		35,711		36,202		71,913
Residential mortgage-backed securities	—		—		79,386		79,386
Total securities	—		365,136		154,539		519,675
Corporate loans, at estimated fair value	—		72,114		84,481		156,595
Equity investments, at estimated fair value	46,753		33,746		110,654		191,153
Derivatives:
Foreign exchange options	—		—		8,420		8,420
Commodity swaps	—		7,464		—		7,464
Common stock warrants	2,455		—		2,086		4,541
Interest rate swaps	—		2,294		—		2,294
Foreign exchange forward contracts	—		3,016		—		3,016
Credit default swaps—protection purchased	—		4		—		4
Total rate of return swaps	—		729		—		729
Options	—		—		8,880		8,880
Total derivatives	2,455		13,507		19,386		35,348
Other assets:
Interests in joint ventures and partnerships	—		—		332,921		332,921
Other assets	—		534		—		534
Total other assets	—		534		332,921		333,455
Total	$	49,208	$	485,037	$	701,981	$	1,236,226
Liabilities:
Securities sold, not yet purchased	2,662		—		—		2,662
Derivatives:
Interest rate swaps	—		54,626		—		54,626
Foreign exchange forward contracts	—		26,190		—		26,190
Credit default swaps—protection purchased	—		1,669		—		1,669
Commodity swaps	—		3,134		—		3,134
Foreign exchange options	—		—		489		489
Total derivatives	—		85,619		489		86,108
Total	$	2,662	$	85,619	$	489	$	88,770

The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of September 30, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands). There were no liabilities measured at fair value on a non-recurring basis:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2013
Corporate loans held for sale(1)	$	—	$	167,950	$	5,120	$	173,070
Total	$	—	$	167,950	$	5,120	$	173,070

(1) As of September 30, 2013, total loans held for sale had a carrying value of $312.3 million of which $173.1 million was carried at estimated fair value and the remaining $139.2 million carried at amortized cost.

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2012
Assets:
Securities:
Corporate debt securities	$	—	$	370,072	$	42,221	$	412,293
Other securities, at estimated fair value	—		34,476		2,909		37,385
Residential mortgage-backed securities	—		—		83,842		83,842
Total securities	—		404,548		128,972		533,520
Corporate loans, at estimated fair value	—		19,738		16,141		35,879
Equity investments, at estimated fair value	23,790		40,085		97,746		161,621
Derivatives:
Foreign exchange options	—		—		8,562		8,562
Commodity swaps	—		8,557		—		8,557
Common stock warrants	1,744		—		1,574		3,318
Foreign exchange forward contracts	—		2,615		—		2,615
Credit default swaps—protection sold	—		19		—		19
Credit default swaps—protection purchased	—		136		—		136
Total derivatives	1,744		11,327		10,136		23,207
Other assets:
Interests in joint ventures and partnerships	—		—		142,477		142,477
Other assets	—		319		—		319
Total other assets	—		319		142,477		142,796
Total	$	25,534	$	476,017	$	395,472	$	897,023
Liabilities:
Securities sold, not yet purchased	$	1,158	$	—	$	—	$	1,158
Derivatives:
Interest rate swaps	—		90,618		—		90,618
Foreign exchange forward contracts	—		23,590		—		23,590
Credit default swaps—protection purchased	—		1,276		—		1,276
Commodity swaps	—		1,501		—		1,501
Foreign exchange options	—		—		285		285
Total derivatives	—		116,985		285		117,270
Total	$	1,158	$	116,985	$	285	$	118,428

The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands). There were no liabilities measured at fair value on a non-recurring basis:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2012
Corporate loans held for sale(1)	$	—	$	49,521	$	24,347	$	73,868
Total	$	—	$	49,521	$	24,347	$	73,868

(1) As of December 31, 2012, total loans held for sale had a carrying value of $128.3 million of which $73.9 million was carried at estimated fair value and the remaining $54.4 million carried at amortized cost.

Level 3 Fair Value Rollforward

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the three months ended September 30, 2013 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities		Other Securities, at Estimated Fair Value			Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value			Options		Common Stock Warrants			Foreign Exchange Options, Net		Interests in Joint Ventures and Partnerships
Beginning balance as of July 1, 2013	$	37,380	$	27,872		$	82,973		$	45,936	$	100,294		$	—	$	3,561		$	5,751	$	235,024
Total gains or losses (for the period):
Included in earnings(1)	297		1,384			1,747			497		5,558			90		(1,475		)	2,180		3,739
Included in other comprehensive income	338		—			—			—		—			—		—			—		—
Transfers into Level 3(2)	—		—			—			—		—			—		—			—		—
Transfers out of Level 3(2)	—		—			—			—		—			—		—			—		—
Purchases	—		8,100			—			37,959		5,000			8,790		—			—		132,198
Sales	—		—			—			—		(198		)	—		—			—		—
Settlements	936		(1,154		)	(5,334		)	89		—			—		—			—		(38,040		)
Ending balance as of September 30, 2013	$	38,951	$	36,202		$	79,386		$	84,841	$	110,654		$	8,880	$	2,086		$	7,931	$	332,921
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	297	$	1,384		$	5,868		$	497	$	5,857		$	90	$	(1,475	)	$	2,180	$	3,739

(1) Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations.

(2) There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized level 3 inputs to determine fair value, for the nine months ended September 30, 2013 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value			Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value			Equity Investments, at Estimated Fair Value			Options		Common Stock Warrants		Foreign Exchange Options, Net			Interests in Joint Ventures and Partnerships
Beginning balance as of January 1, 2013	$	42,221		$	2,909		$	83,842		$	16,141		$	97,746		$	—	$	1,574	$	8,277		$	142,477
Total gains or losses (for the period):
Included in earnings(1)	279			2,656			7,301			(555		)	8,648			90		512		(346		)	7,646
Included in other comprehensive income	559			—			—			—			—			—		—		—			—
Transfers into Level 3(2)	—			—			—			—			—			—		—		—			—
Transfers out of Level 3(2)	—			—			—			—			—			—		—		—			—
Purchases	—			31,791			—			69,727			5,003			8,790		—		—			229,862
Sales	—			—			—			—			(198		)	—		—		—			—
Settlements	(4,108		)	(1,154		)	(11,757		)	(832		)	(545		)	—		—		—			(47,064		)
Ending balance as of September 30, 2013	$	38,951		$	36,202		$	79,386		$	84,481		$	110,654		$	8,880	$	2,086	$	7,931		$	332,291
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	279		$	2,656		$	21,565		$	(851	)	$	8,947		$	90	$	513	$	(346	)	$	7,646

(1) Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations.

(2) There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the three months ended September 30, 2012 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value		Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value		Total Rate of Return Swaps		Common Stock Warrants		Foreign Exchange Options, Net			Interests in Joint Ventures and Partnerships			Other Assets
Beginning balance as of July 1, 2012	$	68,101		$	3,104	$	87,935		$	12,831	$	122,736	$	—	$	1,864	$	8,254		$	98,101		$	—
Total gains or losses (for the period):
Included in earnings(1)	573			252		2,764			264		8,996		—		503		(920		)	3,233			—
Included in other comprehensive loss	6,058			—		—			—		—		—		—		—			—			—
Transfers into Level 3(2)	—			—		—			—		—		—		—		—			—			—
Transfers out of Level 3(2)	—			—		—			—		—		—		—		—			—			—
Purchases	—			—		—			1,650		1,913		—		—		—			11,967			—
Sales	(20,000		)	—		—			—		—		—		—		—			—			—
Settlements	(10,002		)	—		(3,829		)	196		—		—		—		—			(281		)	—
Ending balance as of September 30, 2012	$	44,730		$	3,356	$	86,870		$	14,941	$	133,645	$	—	$	2,367	$	7,334		$	113,020		$	—
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	200		$	252	$	9,073		$	264	$	8,996	$	—	$	503	$	(920	)	$	3,233		$	—

(1) Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign exchange in the condensed consolidated statements of operations.

(2) There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the nine months ended September 30, 2012 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value		Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value			Total Rate of Return Swaps			Common Stock Warrants		Foreign Exchange Options, Net			Interests in Joint Ventures and Partnerships			Other Assets
Beginning balance as of January 1, 2012	$	67,233		$	2,778	$	86,479		$	—	$	150,962		$	152		$	1,266	13,394			$	—		$	567
Total gains or losses (for the period):
Included in earnings(1)	1,026			578		7,498			1,017		13,214			141			1,101		(6,060		)	751			342
Included in other comprehensive loss	12,026			—		—			—		—			—			—		—			—			—
Transfers into Level 3(2)	—			—		—			—		—			—			—		—			34,230			—
Transfers out of Level 3(2)	—			—		—			—		(34,230		)	—			—		—			—			—
Purchases	—			—		—			13,494		8,064			—			—		—			78,508			—
Sales	(24,660		)	—		—			—		(4,365		)	—			—		—			—			(706		)
Settlements	(10,895		)	—		(7,107		)	430		—			(293		)	—		—			(469		)	(203		)
Ending balance as of September 30, 2012	$	44,730		$	3,356	$	86,870		$	14,941	$	133,645		$	—		$	2,367	$	7,334		$	113,020		$	—
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	417		$	578	$	24,228		$	1,017	$	10,211		$	—		$	1,101	$	(6,060	)	$	751		$	—

(1) Amounts are included in net realized and unrealized gain on investments or net realized and unrealized loss on derivatives and foreign in the condensed consolidated statements of operations.

(2) There were no transfers between Level 1 or 2. The transfers into and out of Level 3 represented the reclassification of certain assets from equity investments, at estimated fair value to interests in joint ventures and partnerships. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

Valuation Techniques and Inputs for Level 3 Fair Value Measurements

The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivatives, that are measured at fair value and categorized within Level 3 as of September 30, 2013 (dollar amounts in thousands):

	Balance as of September 30, 2013		Valuation Techniques(1)	Unobservable Inputs(2)	Range (Weighted Average)(3)	Impact to Valuation from an Increase in Input(4)
Assets:
Securities available-for-sale: Corporate debt securities	$	38,951	Yield Analysis	Yield	12% - 14% (13%)	Decrease
				Net leverage	6x - 7x (6x)	Decrease
				EBITDA multiple	8x - 9x (9x)	Increase
			Broker quotes	Offered quotes	70 - 105 (101)	Increase
Other securities, at estimated fair value	$	36,202	Yield Analysis	Yield	9% - 12% (11%)	Decrease
				EBITDA multiple	7x (7x)	Increase
				Illiquidity discount	5% (5%)	Decrease
Residential mortgage-backed securities	$	79,386	Discounted cash flows	Probability of default Loss severity	0% - 41% (10%) 12% - 78% (26%)	Decrease Decrease
				Constant prepayment rate	3% - 33% (16%)		(5)
Corporate loans, at estimated fair value	$	84,481	Yield Analysis	Yield Discount margin	11% - 16% (16%) 900bps-1500bps	Decrease Decrease
					(1450bps)
				Illiquidity discount	10% (10%)	Decrease
				Net leverage	5x - 15x (7x)	Decrease
				EBITDA multiple	8x - 9x (9x)	Increase
			Broker quotes	Offered quotes	11 - 38 (38)	Increase
Equity investments, at estimated fair value (6)	$	110,654	Market comparables	LTM EBITDA multiple	6x - 15x (12x)	Increase
				Forward EBITDA multiple	9x - 13x (11x)	Increase
				Illiquidity discount	5% - 15% (9%)	Decrease
			Discounted cash flows	Weighted average cost of capital	8% - 14% (11%)	Decrease
				LTM EBITDA exit multiple	7x - 11x (9x)	Increase
Common stock warrants	$	2,086	Market comparables	LTM EBITDA multiple	7x - 8x (8x)	Increase
Foreign exchange options	$	8,420	Option pricing model	Forward and spot rates	0 - 1 (1)		(7)
Interests in joint ventures and partnerships	$	332,921	Discounted cash flows	Illiquidity discount	10% - 15% (12%)	Decrease
				Weighted average cost of capital	10% - 27% (13%)	Decrease
Options	$	8,880	—	—	—		(8)
Liabilities:
Foreign exchange options	$	489	Option pricing model	Forward and spot rates	0.02 (0.02)		(7)

(1) For the assets that have more than one valuation technique, the Company may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. When determining the weighting ascribed to each valuation methodology, the Company considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among the investments and in certain instances, may result in up to a 100% weighting to a single methodology. Broker quotes obtained for valuation purposes are reviewed by the Company through other valuation techniques.

(2) The significant unobservable inputs used in the fair value measurement of the Company’s assets and liabilities may include the last twelve months (“LTM”) EBITDA multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a variety of factors including economic, industry and market trends and developments; market valuations of comparable companies; and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement.

(3) Weighted average amounts are based on the estimated fair values.

(4) Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

(5) The impact of changes in prepayment speeds may have differing impacts depending on the seniority of the instrument. Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6) When determining the illiquidity discount to be applied, the Company takes a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments carried at estimated fair value. The Company then evaluates such investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include the salability of the investment, whether the issuer is undergoing significant restructuring activity or similar factors, as well as characteristics about the issuer including its size and/or whether it is experiencing, or expected to experience, a significant decline in earnings. Depending on the applicability of these factors, the Company determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time the Company holds the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by the Company in its valuations.

(7) The directional change from an increase in forward and spot rates varies and is dependent on the specific option.

(8) Options were purchased on September 25, 2013 and as such, the cost approximated fair value.

The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivatives, that are measured at fair value and categorized within Level 3 as of December 31, 2012 (dollar amounts in thousands):

	Balance as of December 31, 2012		Valuation Techniques(1)	Unobservable Inputs(2)	Range (Weighted Average)(3)	Impact to Valuation from an Increase in Input(4)
Assets:
Securities available-for-sale: Corporate debt securities	$	42,221	Yield Analysis	Yield Discount margin	11% - 46% (16%) 1100bps - 4550bps	Decrease Decrease
					(1450bps)
				Net leverage	3x - 13x (6x)	Decrease
				Illiquidity discount	3% (3%)	Decrease
				EBITDA multiple	6x - 8x (7x)	Increase
			Broker quotes	Offered quotes	69 - 105 (88)	Increase
Other securities, at estimated fair value	$	2,909	Yield Analysis	Yield	10% (10%)	Decrease
Residential mortgage-backed securities	$	83,842	Discounted cash flows	Probability of default Loss severity	0% - 21% (6%) 18% - 80% (30%)	Decrease Decrease
				Constant prepayment rate	1% - 35% (13%)		(5)
Corporate loans, at estimated fair value	$	16,141	Yield Analysis	Illiquidity discount Net leverage	15% (15%) 8x - 9x (9x)	Decrease Decrease
				EBITDA multiple	9x - 10x (10x)	Increase
			Broker quotes	Offered quotes	8 - 40 (39)	Increase
Equity investments, at estimated fair value (6)	$	97,746	Market comparables	LTM EBITDA multiple	7x - 12x (10x)	Increase
				Forward EBITDA multiple	6x - 12x (10x)	Increase
			Discounted cash flows	Weighted average cost of capital	6% - 16% (10%)	Decrease
				LTM EBITDA exit multiple	7x - 12x (9x)	Increase
Common stock warrants	$	1,574	Market comparables	LTM EBITDA multiple	7x (7x)	Increase
				Forward EBITDA multiple	7x (7x)	Increase
				Illiquidity discount	15% (15%)	Decrease
			Discounted cash flows	Weighted average cost of capital	12% (12%)	Decrease
				LTM EBITDA exit multiple	7x (7x)	Increase
Foreign exchange options	$	8,562	Option pricing model	Forward and spot rates	0 - 2 (1)		(7)
Interests in joint ventures and partnerships	$	142,477	Discounted cash flows	Illiquidity discount	10% - 15% (10%)	Decrease
				Weighted average cost of capital	13% - 30% (18%)	Decrease
Liabilities:
Foreign exchange options	$	285	Option pricing model	Forward and spot rates	0.02 (0.02)		(7)

(1) For the assets that have more than one valuation technique, the Company may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. When determining the weighting ascribed to each valuation methodology, the Company considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among the investments and in certain instances, may result in up to a 100% weighting to a single methodology. Broker quotes obtained for valuation purposes are reviewed by the Company through other valuation techniques.

(2) The significant unobservable inputs used in the fair value measurement of the Company’s assets and liabilities may include the last twelve months (“LTM”) EBITDA multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a variety of factors including economic, industry and market trends and developments; market valuations of comparable companies; and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement.

(3) Weighted average amounts are based on the estimated fair values.

(4) Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

(5) The impact of changes in prepayment speeds may have differing impacts depending on the seniority of the instrument. Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6) When determining the illiquidity discount to be applied, the Company takes a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments carried at estimated fair value. The Company then evaluates such investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include the salability of the investment, whether the issuer is undergoing significant restructuring activity or similar factors, as well as characteristics about the issuer including its size and/or whether it is experiencing, or expected to experience, a significant decline in earnings. Depending on the applicability of these factors, the Company determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time the Company holds the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by the Company in its valuations.

(7) The directional change from an increase in forward and spot rates varies and is dependent on the specific option.

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Oct. 30, 2013
Document and Entity Information
Entity Registrant Name	KKR Financial Holdings LLC
Entity Central Index Key	0001386926
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		204,824,159
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3

XML

SEGMENT REPORTING

9 Months Ended

Sep. 30, 2013

SEGMENT REPORTING

SEGMENT REPORTING

NOTE 14. SEGMENT REPORTING

Operating segments are defined as components of a company in which separate financial information is available and reviewed by the chief operating decision maker or group in determining how to allocate resources and assessing performance. The Company operates its business through multiple reportable segments. Effective September 30, 2012, based on the growing significance of natural resources, the Company changed the basis of presentation from reporting solely the credit (“Credit”) and other segments (“Other”) to reporting Credit, natural resources (“Natural Resources”) and Other. Prior period balances have been reclassified for comparative purposes.

The Company’s segments are differentiated primarily by their investment focuses. The Credit segment consists primarily of below investment grade corporate debt comprised of senior secured and unsecured loans, mezzanine loans, private and public equity investments, and distressed and stressed debt securities. The Natural Resources segment, which was previously included within Other, consists of non-operated working and overriding royalty interests in oil and natural gas properties. The Other segment includes all other portfolio holdings, consisting solely of commercial real estate. The segments currently reported are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by the Company.

The Company evaluates the performance of its segments based on several net income components. Net income includes (i) revenues, (ii) related investment costs and expenses, (iii) other income (loss), which is comprised primarily of unrealized and realized gains and losses on investments and derivatives, and (iv) other expenses, including related party management compensation and general and administrative expenses. Certain corporate assets and expenses that are not directly related to the individual segments, including interest expense and related costs on borrowings, base management fees and professional services are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period-end. Certain other corporate assets and expenses, including prepaid insurance, incentive fees, insurance expenses, directors’ expenses and share-based compensation expense are not allocated to individual segments in the Company’s assessment of segment performance. Collectively, these items are included as reconciling items between reported segment amounts and consolidated totals.

The following table shows data of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

For the three months ended	Credit				Natural Resources						Other					Reconciling Items(1)						Total Consolidated
September 30	2013		2012		2013			2012			2013		2012			2013			2012			2013		2012
Total revenues	$	96,243	$	121,808	$	32,446		$	21,487		$	13	$	39		$	—		$	—		$	128,702	$	143,334
Total investment costs and expenses	55,253		51,681		22,386			19,120			238		99			—			—			77,877		70,900
Total other income (loss)	6,969		78,258		(3,437		)	(5,215		)	2,694		—			—			—			6,226		73,043
Total other expenses	14,155		11,302		1,269			2,025			116		49			1,607			19,820			17,147		33,196
Income tax expense	9		316		—			—			9		1			—			—			18		317
Net income (loss)	$	33,795	$	136,767	$	5,354		$	(4,873	)	$	2,344	$	(110	)	$	(1,607	)	$	(19,820	)	$	39,886	$	111,964

For the nine months ended	Credit					Natural Resources						Other					Reconciling Items(2)						Total Consolidated
September 30	2013		2012			2013			2012			2013		2012			2013			2012			2013		2012
Total revenues	$	320,769	$	377,517		$	84,118		$	44,262		$	1,509	$	39		$	—		$	—		$	406,396	$	421,818
Total investment costs and expenses	162,097		204,443			61,355			41,179			667		185			—			—			224,119		245,807
Total other income (loss)	132,853		170,505			(918		)	(1,636		)	6,015		—			(20,269		)	(445		)	117,681		168,424
Total other expenses	43,151		35,852			3,698			4,638			484		92			27,837			36,184			75,170		76,766
Income tax expense (benefit)	420		(3,549		)	—			—			14		1			—			—			434		(3,548		)
Net income (loss)	$	247,954	$	311,276		$	18,147		$	(3,191	)	$	6,359	$	(239	)	$	(48,106	)	$	(36,629	)	$	224,354	$	271,217

(1) Consists of certain expenses not allocated to individual segments including incentive fees of zero and $17.8 million for the three months ended September 30, 2013 and 2012, respectively. The remaining reconciling items include insurance expenses, directors’ expenses and share-based compensation expense.

(2) Consists of certain expenses not allocated to individual segments including incentive fees of $22.7 million and $31.5 million for the nine months ended September 30, 2013 and 2012, respectively and losses on restructuring and extinguishment of debt of $20.3 million and $0.4 million for the nine months ended September 30, 2013 and 2012, respectively. The remaining reconciling items include insurance expenses, directors’ expenses and share-based compensation expense.

The following table shows total assets of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements as of September 30, 2013 and December 31, 2012 (amounts in thousands):

	Credit				Natural Resources				Other				Reconciling Items				Total Consolidated
As of	September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
Total assets	$	7,823,309	$	7,904,116	$	483,546	$	399,225	$	163,940	$	53,742	$	1,196	$	1,796	$	8,471,991	$	8,358,879

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DERIVATIVE INSTRUMENTS (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Net gains (losses) recognized in accumulated other comprehensive loss on cash flow hedges
Net gains recognized in accumulated other comprehensive loss on cash flow hedges	$ 6,813	$ 2,767	$ 38,211	$ 1,580

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DERIVATIVE INSTRUMENTS (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Estimated Fair Value	$ (50,760)	$ (94,063)
Options
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Estimated Fair Value	8,880
Cash Flow Hedges: | Interest rate swaps
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Notional amount	485,833	503,833
Estimated Fair Value	(52,332)	(90,618)
Free-Standing Derivatives: | Commodity swaps
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Estimated Fair Value	4,330	7,056
Free-Standing Derivatives: | Credit default swaps-protection sold
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Estimated Fair Value		19
Free-Standing Derivatives: | Credit default swaps-protection purchased
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Notional amount	(109,953)	(47,321)
Estimated Fair Value	(1,665)	(1,140)
Free-Standing Derivatives: | Foreign exchange forward contracts
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Notional amount	(293,457)	(338,313)
Estimated Fair Value	(23,174)	(20,975)
Free-Standing Derivatives: | Foreign exchange options
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Notional amount	130,207	130,207
Estimated Fair Value	7,931	8,277
Free-Standing Derivatives: | Common stock warrants
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Estimated Fair Value	4,541	3,318
Free-Standing Derivatives: | Total Rate of Return Swaps
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Estimated Fair Value	$ 729