Exhibit 99.1
Investor Contact
Laurie Poggi
Kohlberg Kravis Roberts & Co. L.P.
415-315-3718 | | Media Contact
Roanne Kulakoff and Joseph Kuo
Kekst and Company
212-521-4837 and 212-521-4863 |
KKR Financial Holdings LLC Announces Second Quarter 2008 Financial Results
and Quarterly Distribution of $0.40 per Common Share
SAN FRANCISCO, CA, August 7, 2008—KKR Financial Holdings LLC (NYSE: KFN) (“KFN” or the “Company”) today announced its results for the second quarter ended June 30, 2008.
Highlights of KKR Financial Holdings LLC’s results include:
· Distribution of $0.40 per common share declared for the second quarter.
· For the second quarter ended June 30, 2008, GAAP net income totaled $37.6 million, or $0.26 per diluted common share and economic net income, a non-GAAP financial measurement, totaled $37.9 million, or $0.26 per diluted common share. Economic net income is the Company’s net income adjusted to exclude share-based compensation expense.
· Elimination of all short-term debt during the quarter ended June 30, 2008.
· Sales of $422.0 million of investments with a weighted-average discount margin of 5.42% and purchases of $456.2 million of investments with a weighted-average discount margin of 8.41%.
* * *
For the three and six months ended June 30, 2008, the Company reported GAAP net income totaling $37.6 million, or $0.26 per diluted common share, and $51.5 million, or $0.39 per diluted common share, respectively. GAAP net income for the three and six months ended June 30, 2007 totaled $53.0 million, or $0.65 per diluted common share, and $101.4 million, or $1.24 per diluted common share, respectively.
For the three and six months ended June 30, 2008, economic net income, a non-GAAP financial measurement, totaled $37.9 million, or $0.26 per diluted common share, and $52.6 million, or $0.40 per diluted common share, respectively. Economic net income, a non-GAAP financial measurement, for the three and six months ended June 30, 2007 totaled $53.8 million, or $0.66 per diluted common share, and $108.1 million, or $1.32 per diluted common share, respectively. Economic net income is the Company’s net income adjusted to exclude share-based compensation. A reconciliation of GAAP net income to economic net income is provided in Schedule IV.
Distribution
On August 7, 2008, the Company’s Board of Directors declared a distribution of $0.40 per common share for the quarter ended June 30, 2008. The distribution is payable on August 29, 2008 to shareholders of record as of the close of business on August 15, 2008.
Debt Transactions
During the quarter ended June 30, 2008, the Company eliminated all short-term debt and as of June 30, 2008, the Company had no debt maturing in the next twelve months.
In addition, during the quarter ended June 30, 2008, the Company retired $35.0 million of trust preferred securities at a weighted-average dollar price of 50.8 and recorded a gain from the transactions of $17.2 million.
Economic Portfolio Activity
During the quarter ended June 30, 2008, the Company began repositioning its portfolio to take advantage of opportunities in the market. During the quarter, the Company sold $422.0 million of investments with a weighted-average discount margin of 5.42%. Also during the quarter, the Company purchased $456.2 million of investments with a weighted-average discount margin of 8.41%.
In addition, the Company received approximately $150.0 million of principal payments during the second quarter of 2008 on existing investments that the Company expects to generate incremental earnings from as it continues to invest at today’s attractive market prices.
Common Share Offering
On April 8, 2008, the Company consummated a public offering of 34.5 million common shares at a price of $11.85 per common share. Net proceeds from the transaction before expenses totaled $384.3 million, which the Company will use for general corporate purposes.
Leverage
As of June 30, 2008, net economic leverage, a non-GAAP financial measurement, was 2.9x. The computation of net economic leverage is included in Schedule IV.
Book Value Per Common Share
The Company’s GAAP book value per common share outstanding was $12.71 and $14.27 as of June 30, 2008 and December 31, 2007, respectively.
Information for Investors: Conference Call and Webcast
The Company will host a conference call and audio webcast to review its second quarter 2008 results on Thursday, August 7, 2008, at 5:00 p.m. EDT. The conference call can be accessed by dialing 877-397-0250 (Domestic) or 719-325-4879 (International); a pass code is not required. A replay will be available through Thursday, August 21, 2008 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 7459334. Supplemental materials that will be discussed during the call, as well as a live webcast of the call, will be accessible on the Company’s website, at www.kkrkfn.com, via a link from the Investor Relations section. A replay of the audio webcast will be archived in the Investor Relations section of the Company’s website.
Note Regarding Use of Non-GAAP Financial Measurements
The non-GAAP financial measurements referred to in this earnings release are provided as supplemental information, and should not be relied upon as alternative measures to GAAP. These non-GAAP financial measurements consist of items calculated by the Company on an “economic” basis, which includes the following: (i) presentation of the Company’s proportionate share of certain structured finance vehicles where the Company holds a majority ownership interest (the “Joint CLOs”) and consolidates such vehicles in accordance with GAAP and (ii) exclusion of share-based compensation in the calculation of economic net income or loss. The Company believes that the non-GAAP financial measurements presented in this earnings release provide useful information to investors by providing an understanding of the Company’s financial condition and operating performance by which liquidity and periodic results, for purposes of evaluating the net income available for distributions to shareholders, can be assessed.
About KKR Financial Holdings LLC
KKR Financial Holdings LLC is a publicly traded specialty finance company that invests in multiple asset classes. KKR Financial Holdings LLC is externally managed by KKR Financial Advisors LLC, a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. (Fixed Income) LLC, which is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P. KKR Financial Holdings LLC is an affiliate of Kohlberg Kravis Roberts & Co. L.P. Additional information regarding KKR Financial Holdings LLC is available at http://www.kkrkfn.com.
Statements in this press release which are not historical fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although KKR Financial Holdings LLC believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from the Company’s expectations include completion of pending investments, continued ability to source new investments, the availability and cost of capital for future investments, competition within the specialty finance sector, economic conditions, credit loss experience, availability of financing, maintenance of sufficient liquidity, and other risks disclosed from time to time in the Company’s filings with the SEC.
Schedule I
KKR Financial Holdings LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share information)
| | For the three | | For the three | | For the six | | For the six | |
| | months ended | | months ended | | months ended | | months ended | |
| | June 30, 2008 | | June 30, 2007 | | June 30, 2008 | | June 30, 2007 | |
Net investment income: | | | | | | | | | |
Securities interest income | | $ | 34,788 | | $ | 27,262 | | $ | 74,597 | | $ | 49,935 | |
Loan interest income | | 184,550 | | 146,435 | | 401,087 | | 277,812 | |
Dividend income | | 1,092 | | 965 | | 1,908 | | 1,940 | |
Other interest income | | 4,998 | | 5,674 | | 16,074 | | 8,251 | |
Total investment income | | 225,428 | | 180,336 | | 493,666 | | 337,938 | |
Interest expense | | (128,037 | ) | (124,265 | ) | (282,102 | ) | (236,050 | ) |
Interest expense to affiliates | | (19,707 | ) | (8,256 | ) | (47,525 | ) | (8,256 | ) |
Provision for loan losses | | (10,000 | ) | — | | (10,000 | ) | — | |
Net investment income | | 67,684 | | 47,815 | | 154,039 | | 93,632 | |
Other (loss) income: | | | | | | | | | |
Net realized and unrealized (loss) gain on derivatives and foreign exchange | | (5,918 | ) | 6,481 | | (52,934 | ) | 13,619 | |
Net realized and unrealized (loss) gain on investments | | (17,217 | ) | 26,739 | | (30,976 | ) | 33,764 | |
Net realized and unrealized (loss) gain on residential mortgage-backed securities, residential mortgage loans, and residential mortgage-backed securities issued, carried at estimated fair value | | (5,594 | ) | 1,526 | | (14,772 | ) | (1,691 | ) |
Net realized and unrealized gain on securities sold, not yet purchased | | 1,664 | | 575 | | 8,650 | | 575 | |
Gain on extinguishment of debt | | 17,225 | | — | | 17,225 | | — | |
Other income | | 513 | | 2,540 | | 5,469 | | 4,588 | |
Total other (loss) income | | (9,327 | ) | 37,861 | | (67,338 | ) | 50,855 | |
Non-investment expenses: | | | | | | | | | |
Related party management compensation | | 10,387 | | 15,114 | | 19,546 | | 34,413 | |
General, administrative and directors expenses | | 5,752 | | 3,991 | | 10,274 | | 10,252 | |
Professional services | | 1,071 | | 759 | | 2,928 | | 1,300 | |
Loan servicing | | 2,391 | | 2,939 | | 4,960 | | 6,023 | |
Total non-investment expenses | | 19,601 | | 22,803 | | 37,708 | | 51,988 | |
Income from continuing operations before equity in income of unconsolidated affiliate and income tax expense | | 38,756 | | 62,873 | | 48,993 | | 92,499 | |
Equity in income of unconsolidated affiliate | | — | | 5,725 | | — | | 12,706 | |
Income from continuing operations before income tax expense | | 38,756 | | 68,598 | | 48,993 | | 105,205 | |
Income tax expense | | (116 | ) | (83 | ) | (116 | ) | (859 | ) |
Income from continuing operations | | 38,640 | | 68,515 | | 48,877 | | 104,346 | |
(Loss) income from discontinued operations | | (1,079 | ) | (15,544 | ) | 2,668 | | (2,951 | ) |
Net income | | $ | 37,561 | | $ | 52,971 | | $ | 51,545 | | $ | 101,395 | |
| | | | | | | | | |
Net income per common share: | | | | | | | | | |
Basic | | | | | | | | | |
Income per share from continuing operations | | $ | 0.26 | | $ | 0.85 | | $ | 0.38 | | $ | 1.30 | |
(Loss) income per share from discontinued operations | | — | | (0.19 | ) | 0.02 | | (0.04 | ) |
Net income per share | | $ | 0.26 | | $ | 0.66 | | $ | 0.40 | | $ | 1.26 | |
Diluted | | | | | | | | | |
Income per share from continuing operations | | $ | 0.26 | | $ | 0.84 | | $ | 0.37 | | $ | 1.28 | |
(Loss) income per share from discontinued operations | | — | | (0.19 | ) | 0.02 | | (0.04 | ) |
Net income per share | | $ | 0.26 | | $ | 0.65 | | $ | 0.39 | | $ | 1.24 | |
| | | | | | | | | |
Weighted-average number of common shares outstanding: | | | | | | | | | |
Basic | | 146,025 | | 80,241 | | 130,289 | | 80,240 | |
Diluted | | 146,749 | | 81,933 | | 130,964 | | 81,805 | |
| | | | | | | | | |
Distributions declared per common share | | $ | 0.40 | | $ | 0.56 | | $ | 0.90 | | $ | 1.10 | |
Schedule II
KKR Financial Holdings LLC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share information)
| | As of
June 30, 2008 | | As of
December 31, 2007 | |
Assets | | | | | |
Cash and cash equivalents | | $ | 189,008 | | $ | 524,080 | |
Restricted cash and cash equivalents | | 730,303 | | 1,067,797 | |
Securities available-for-sale, $1,087,747 and $1,346,247 pledged as collateral as of June 30, 2008 and December 31, 2007, respectively | | 1,117,788 | | 1,359,541 | |
Corporate loans, net of allowance for loan losses of $35,000 and $25,000 as of June 30, 2008 and December 31, 2007, respectively | | 8,708,005 | | 8,634,208 | |
Residential mortgage-backed securities, at estimated fair value, $72,668 and $117,833 pledged as collateral as of June 30, 2008 and December 31, 2007, respectively | | 115,652 | | 131,688 | |
Residential mortgage loans, at estimated fair value | | 3,394,996 | | 3,921,323 | |
Corporate loans held for sale | | 66,652 | | — | |
Derivative assets | | 28,436 | | 18,737 | |
Interest and principal receivable | | 111,038 | | 162,465 | |
Non-marketable equity securities | | 20,079 | | 20,084 | |
Reverse repurchase agreements | | — | | 69,840 | |
Other assets | | 78,459 | | 86,504 | |
Assets of discontinued operations | | — | | 3,049,758 | |
Total assets | | $ | 14,560,416 | | $ | 19,046,025 | |
Liabilities | | | | | |
Repurchase agreements | | $ | — | | $ | 2,808,066 | |
Collateralized loan obligation senior secured notes | | 7,549,318 | | 5,948,610 | |
Collateralized loan obligation junior secured notes to affiliates | | 525,420 | | 525,420 | |
Secured revolving credit facility | | 378,306 | | 167,024 | |
Secured demand loan | | — | | 24,151 | |
Convertible senior notes | | 300,000 | | 300,000 | |
Junior subordinated notes | | 293,826 | | 329,908 | |
Subordinated notes to affiliates | | 80,000 | | 152,574 | |
Residential mortgage-backed securities issued, at estimated fair value | | 3,204,392 | | 3,169,353 | |
Accounts payable, accrued expenses and other liabilities | | 13,392 | | 7,390 | |
Accrued interest payable | | 97,749 | | 114,035 | |
Accrued interest payable to affiliates | | 55,375 | | 44,121 | |
Related party payable | | 5,439 | | 9,694 | |
Securities sold, not yet purchased | | 22,890 | | 100,394 | |
Derivative liabilities | | 116,880 | | 56,663 | |
Liabilities of discontinued operations | | — | | 3,644,083 | |
Total liabilities | | 12,642,987 | | 17,401,486 | |
Shareholders’ Equity | | | | | |
Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding at June 30, 2008 and December 31, 2007 | | — | | — | |
Common shares, no par value, 250,000,000 shares authorized, and 150,843,151 and 115,248,990 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively | | — | | — | |
Paid-in-capital | | 2,551,800 | | 2,167,156 | |
Accumulated other comprehensive loss | | (202,586 | ) | (157,245 | ) |
Accumulated deficit | | (431,785 | ) | (365,372 | ) |
Total shareholders’ equity | | 1,917,429 | | 1,644,539 | |
Total liabilities and shareholders’ equity | | $ | 14,560,416 | | $ | 19,046,025 | |
Schedule III
KKR Financial Holdings LLC
ECONOMIC INVESTMENT PORTFOLIO AS OF JUNE 30, 2008 (UNAUDITED)
(amounts in thousands) (1) | | Amortized Cost | | Estimated
Fair Value | | Portfolio Mix
% by Fair Value | |
Corporate loans (2)(3) | | $ | 6,924,449 | | $ | 6,467,907 | | 84.1 | % |
Corporate securities (3) | | 1,004,765 | | 871,315 | | 11.3 | |
Residential mortgage-backed securities (4) | | 368,278 | | 315,175 | | 4.1 | |
Marketable equity securities | | 28,154 | | 17,666 | | 0.2 | |
Non-marketable equity securities | | 20,079 | | 20,079 | | 0.3 | |
Total | | $ | 8,345,725 | | $ | 7,692,142 | | 100.0 | % |
(1) The table excludes securities sold, not yet purchased with a cost of $27.2 million and an estimated fair value of $22.9 million.
(2) Total loans exclude the allowance for loan losses of $35.0 million and include loans held for sale with an estimated fair value of $48.6 million.
(3) Represents corporate loans and securities adjusted to reflect the Company’s proportionate share of its investment of the Joint CLOs as further described above in the note regarding use of non-GAAP financial measurements. GAAP corporate loans and securities have an amortized cost of $8.8 billion and $1.3 billion, respectively, and estimated fair value of $8.2 billion and $1.1 billion, respectively.
(4) Represents residential mortgage-backed securities with a cost of $134.5 million and an estimated fair value of $115.7 million, plus the net difference between residential mortgage loans (cost of $3.7 billion and estimated fair value of $3.4 billion) and residential mortgage-backed securities issued (cost of $3.4 billion and estimated fair value of $3.2 billion) plus $8.9 million of real estate owned, which is included in other assets on the consolidated balance sheet.
Schedule IV
KKR Financial Holdings LLC
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASUREMENTS (UNAUDITED)
Economic Net Income
The reconciliation of economic net income to GAAP net income for the three and six months ended June 30, 2008 and 2007 is as follows:
(amounts in thousands) | | For the three months ended June 30, 2008 | | For the three months ended June 30, 2007 | | For the six months ended June 30, 2008 | | For the six months ended June 30, 2007 | |
Economic net income | | $ | 37,934 | | $ | 53,825 | | $ | 52,558 | | $ | 108,087 | |
Share-based compensation | | (373 | ) | (854 | ) | (1,013 | ) | (6,692 | ) |
GAAP net income | | $ | 37,561 | | $ | 52,971 | | $ | 51,545 | | $ | 101,395 | |
Net Economic Leverage
The computation of net economic leverage as of June 30, 2008 is as follows:
(amounts in thousands) | | | |
Economic borrowings: | | | |
Collateralized loan obligation senior secured notes | | $ | 5,983,917 | |
Secured revolving credit facility | | 378,306 | |
Convertible senior notes | | 300,000 | |
Total economic borrowings excluding junior subordinated notes | | 6,662,223 | |
Less: Economic unrestricted cash | | (189,008 | ) |
Total economic debt excluding junior subordinated notes and economic unrestricted cash (A) | | $ | 6,473,215 | |
| | | |
Total economic shareholders’ equity | | $ | 1,960,705 | |
Economic junior subordinated notes | | 293,826 | |
Total economic shareholders’ equity including economic junior subordinated notes (B) | | $ | 2,254,531 | |
| | | |
Net economic leverage (A)/(B) | | 2.9x | |
