Exhibit 99.1
Investor Contact |
| Media Contact |
Laurie Poggi |
| Roanne Kulakoff and Joseph Kuo |
Kohlberg Kravis Roberts & Co. L.P. |
| Kekst and Company |
415-315-3718 |
| 212-521-4837 and 212-521-4863 |
KKR Financial Holdings LLC Announces Third Quarter 2008 Financial Results
SAN FRANCISCO, CA, November 10, 2008—KKR Financial Holdings LLC (NYSE: KFN) (“KFN” or the “Company”) today announced its results for the third quarter ended September 30, 2008, as well as several important steps to enhance its flexibility in dealing with the current level of unprecedented market volatility.
Actions to Enhance Flexibility:
· The Company has entered into a $300.0 million senior secured asset-based revolving credit facility that matures in November 2010. The new $300.0 million credit facility is being provided by Bank of America, N.A. and Citicorp North America, Inc. The proceeds from the new facility and existing liquidity will be used to retire the Company’s existing revolving credit facility due June 2009, which currently has $368.3 million in borrowings outstanding. The new facility extends the Company’s revolving credit maturity and provides for less restrictive financial covenants that will enhance the Company’s flexibility to make appropriate portfolio management decisions on behalf of its shareholders.
· The Company has also arranged a $100.0 million standby unsecured revolving credit facility that matures in December 2010. The new $100.0 million credit facility is being provided by the Company’s external manager, KKR Financial Advisors LLC, and Kohlberg Kravis Roberts & Co. (Fixed Income) LLC, the parent of the Company’s external manager. The Company entered into the $100.0 million credit facility in order to enhance the Company’s flexibility, as and if needed, in bridging the difference between the $368.3 million in borrowings outstanding under the existing credit facility with the $300.0 million borrowing capacity under the new facility.
· The Company has elected to retain capital and not pay a dividend for the third quarter of 2008.
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Third Quarter Results
· For the third quarter ended September 30, 2008, GAAP net income totaled $49.0 million, or $0.33 per diluted common share and economic net income, a non-GAAP financial measurement, totaled $48.9 million, or $0.33 per diluted common share. Economic net income is the Company’s GAAP net income adjusted to exclude share-based compensation expense.
For the three and nine months ended September 30, 2008, the Company reported GAAP net income totaling $49.0 million, or $0.33 per diluted common share, and $100.5 million, or $0.73 per diluted common share, respectively. GAAP net loss for the three and nine months ended September 30, 2007 totaled $261.5 million, or $(2.98) per diluted common share, and $160.1 million, or $(1.93) per diluted common share, respectively.
For the three and nine months ended September 30, 2008, economic net income, a non-GAAP financial measurement, totaled $48.9 million, or $0.33 per diluted common share, and $101.5 million, or $0.74 per diluted common share, respectively. Economic net loss, a non-GAAP financial measurement, for the three and nine months ended September 30, 2007 totaled $265.9 million, or $(3.03) per diluted common share, and $157.8 million, or $(1.91) per diluted common share, respectively. Economic net income is the Company’s net income adjusted to exclude share-based compensation. A reconciliation of GAAP net income to economic net income is provided in Schedule IV.
In addition, during the quarter ended September 30, 2008, the Company retired $5.0 million of trust preferred securities at a weighted-average dollar price of 38.0 and recorded a gain from the transactions of $3.1 million.
Senior Secured Asset-Based Revolving Credit Facility
On November 10, 2008, the Company entered into an agreement to replace its existing revolving credit facility with a new $300.0 million senior secured asset-based revolving credit facility. The new facility matures on November 10, 2010. The facility bears interest at a rate of 30-day London interbank offered rate (“LIBOR”) plus 3.00% per annum and the commitment of the initial lenders in the facility is reduced to $150.0 million on the one-year anniversary of the facility. The Company can satisfy the $150.0 million commitment reduction by either paying down the facility or syndicating the facility to other lenders prior to November 10, 2009. Under the terms of the credit agreement, the Company will be restricted from making cash distributions to its shareholders in excess of the amount estimated by the Company to be necessary for its shareholders to satisfy their federal and state tax liabilities with respect to their allocable share of the Company’s taxable income. This restriction will terminate as of November 10, 2009 as long as the Company satisfies certain borrowing base conditions contained in the credit agreement. The Company currently has $368.3 million outstanding under its existing revolving credit facility. As described under “Standby Revolving Credit Facility,” the Company has entered into a $100.0 million unsecured revolving credit agreement in order to enhance the Company’s flexibility in bridging the difference in the balance outstanding under its current credit facility with the borrowing capacity under the new facility.
Standby Revolving Credit Facility
On November 10, 2008, the Company entered into an agreement for a two-year $100.0 million standby unsecured revolving credit agreement with the Company’s external manager, KKR Financial Advisors LLC, and Kohlberg Kravis Roberts & Co. (Fixed Income) LLC, the parent of the Company’s external manager. The borrowing facility matures in December 2010 and bears interest at a rate equal to LIBOR for an interest period of 1, 2 or 3 months (at the Company’s option) plus 15.00% per annum. Under the terms of the agreement, the Company can elect to capitalize a portion of accrued interest on any loan under the agreement by adding up to 80% of the interest due and payable at a particular time in respect of such loan to the outstanding principal amount of the loan.
Election Not to Pay a Third Quarter Dividend
The Company has elected to retain capital and not pay a dividend for the third quarter of 2008. The Company’s decision to suspend its dividend to shareholders stems from the unprecedented level of illiquidity in the global financial markets and the Company’s determination that maintaining maximum flexibility through retaining capital is prudent given the current environment.
Leverage
As of September 30, 2008, net economic leverage, a non-GAAP financial measurement, was 3.1x. The computation of net economic leverage is included in Schedule IV.
Book Value Per Common Share
The Company’s GAAP book value per common share outstanding was $11.47 and $14.27 as of September 30, 2008 and December 31, 2007, respectively.
Information for Investors: Conference Call and Webcast
The Company will host a conference call and audio webcast to review its third quarter 2008 results on Monday, November 10, 2008, at 5:00 p.m. EST. The conference call can be accessed by dialing 800-390-5705 (Domestic) or 719-457-2080 (International); a pass code is not required. A replay will be available through Monday, November 17, 2008 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 4264254. Supplemental materials that will be discussed during the call, as well as a live webcast of the call, will be accessible on the Company’s website, at www.kkr.com, via a link from the Investor Relations section. A replay of the audio webcast will be archived in the Investor Relations section of the Company’s website.
Note Regarding Use of Non-GAAP Financial Measurements
The non-GAAP financial measurements referred to in this earnings release are provided as supplemental information, and should not be relied upon as alternative measures to GAAP. These non-GAAP financial measurements consist of items calculated by the Company on an “economic” basis, which includes the following: (i) presentation of the Company’s proportionate share of certain structured finance vehicles where the Company holds a majority ownership interest (the “Joint CLOs”) and consolidates such vehicles in accordance with GAAP and (ii) exclusion of share-based compensation in the calculation of economic net income or loss. The Company believes that the non-GAAP financial measurements presented in this earnings release provide useful information to investors by providing an understanding of the Company’s financial condition and operating performance by which liquidity and periodic results, for purposes of evaluating the net income available for distribution to shareholders, can be assessed.
About KKR Financial Holdings LLC
KKR Financial Holdings LLC is a publicly traded specialty finance company that invests in multiple asset classes. KKR Financial Holdings LLC is externally managed by KKR Financial Advisors LLC, a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. (Fixed Income) LLC, which is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P. Additional information regarding KKR Financial Holdings LLC is available at http://www.kkr.com.
Statements in this press release which are not historical fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although KKR Financial Holdings LLC believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from the Company’s expectations include completion of pending investments, continued ability to source new investments, the availability and cost of capital for future investments, competition within the specialty finance sector, economic conditions, credit loss experience, availability of financing, maintenance of sufficient liquidity, and other risks disclosed from time to time in the Company’s filings with the SEC.
Schedule I
KKR Financial Holdings LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share information)
|
| For the three |
| For the three |
| For the nine |
| For the nine |
| |||||
|
| months ended |
| months ended |
| months ended |
| months ended |
| |||||
|
| September |
| September |
| September |
| September |
| |||||
Net investment income: |
|
|
|
|
|
|
|
|
| |||||
Securities interest income |
| $ | 34,507 |
| $ | 37,725 |
| $ | 109,104 |
| $ | 87,661 |
| |
Loan interest income |
| 187,756 |
| 190,471 |
| 588,843 |
| 468,283 |
| |||||
Dividend income |
| 358 |
| 782 |
| 2,266 |
| 2,722 |
| |||||
Other interest income |
| 4,431 |
| 11,850 |
| 20,505 |
| 20,100 |
| |||||
Total investment income |
| 227,052 |
| 240,828 |
| 720,718 |
| 578,766 |
| |||||
Interest expense |
| (118,105 | ) | (145,058 | ) | (400,207 | ) | (381,107 | ) | |||||
Interest expense to affiliates |
| (18,794 | ) | (21,148 | ) | (66,319 | ) | (29,404 | ) | |||||
Provision for loan losses |
| — |
| (25,000 | ) | (10,000 | ) | (25,000 | ) | |||||
Net investment income |
| 90,153 |
| 49,622 |
| 244,192 |
| 143,255 |
| |||||
Other (loss) income: |
|
|
|
|
|
|
|
|
| |||||
Net realized and unrealized loss on derivatives and foreign exchange |
| (15,534 | ) | (16,042 | ) | (68,468 | ) | (2,422 | ) | |||||
Net realized and unrealized (loss) gain on investments |
| (28,278 | ) | 53,400 |
| (59,254 | ) | 87,164 |
| |||||
Net realized and unrealized gain (loss) on residential mortgage-backed securities, residential mortgage loans, and residential mortgage-backed securities issued, carried at estimated fair value |
| 121 |
| (39,286 | ) | (14,651 | ) | (40,978 | ) | |||||
Net realized and unrealized gain on securities sold, not yet purchased |
| 14,242 |
| 2,220 |
| 22,892 |
| 2,795 |
| |||||
Gain on extinguishment of debt |
| 3,056 |
| — |
| 20,281 |
| — |
| |||||
Other income |
| 2,470 |
| 2,760 |
| 7,939 |
| 7,347 |
| |||||
Total other (loss) income |
| (23,923 | ) | 3,052 |
| (91,261 | ) | 53,906 |
| |||||
Non-investment expenses: |
|
|
|
|
|
|
|
|
| |||||
Related party management compensation |
| 9,811 |
| 4,925 |
| 29,357 |
| 39,338 |
| |||||
General, administrative and directors expenses |
| 3,820 |
| 3,842 |
| 14,094 |
| 14,095 |
| |||||
Professional services |
| 1,335 |
| 2,194 |
| 4,263 |
| 3,495 |
| |||||
Loan servicing |
| 2,274 |
| 2,729 |
| 7,234 |
| 8,751 |
| |||||
Total non-investment expenses |
| 17,240 |
| 13,690 |
| 54,948 |
| 65,679 |
| |||||
Income from continuing operations before equity in income of unconsolidated affiliate and income tax expense |
| 48,990 |
| 38,984 |
| 97,983 |
| 131,482 |
| |||||
Equity in income of unconsolidated affiliate |
| — |
| — |
| — |
| 12,706 |
| |||||
Income from continuing operations before income tax expense |
| 48,990 |
| 38,984 |
| 97,983 |
| 144,188 |
| |||||
Income tax expense |
| — |
| (386 | ) | (116 | ) | (1,245 | ) | |||||
Income from continuing operations |
| 48,990 |
| 38,598 |
| 97,867 |
| 142,943 |
| |||||
Income (loss) from discontinued operations |
| — |
| (300,105 | ) | 2,668 |
| (303,055 | ) | |||||
Net income (loss) |
| $ | 48,990 |
| $ | (261,507 | ) | $ | 100,535 |
| $ | (160,112 | ) | |
|
|
|
|
|
|
|
|
|
| |||||
Net income per common share: |
|
|
|
|
|
|
|
|
| |||||
Basic |
|
|
|
|
|
|
|
|
| |||||
Income per share from continuing operations |
| $ | 0.33 |
| $ | 0.44 |
| $ | 0.72 |
| $ | 1.75 |
| |
Income (loss) per share from discontinued operations |
| — |
| (3.43 | ) | 0.02 |
| (3.71 | ) | |||||
Net income (loss) per share |
| $ | 0.33 |
| $ | (2.99 | ) | $ | 0.74 |
| $ | (1.96 | ) | |
Diluted |
|
|
|
|
|
|
|
|
| |||||
Income per share from continuing operations |
| $ | 0.33 |
| $ | 0.44 |
| $ | 0.71 |
| $ | 1.73 |
| |
Income (loss) per share from discontinued operations |
| — |
| (3.42 | ) | 0.02 |
| (3.66 | ) | |||||
Net income (loss) per share |
| $ | 0.33 |
| $ | (2.98 | ) | $ | 0.73 |
| $ | (1.93 | ) | |
|
|
|
|
|
|
|
|
|
| |||||
Weighted-average number of common shares outstanding: |
|
|
|
|
|
|
|
|
| |||||
Basic |
| 149,612 |
| 87,443 |
| 136,777 |
| 81,692 |
| |||||
Diluted |
| 149,883 |
| 87,696 |
| 137,319 |
| 82,747 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Distributions declared per common share |
| $ | 0.40 |
| $ | 0.56 |
| $ | 1.30 |
| $ | 1.66 |
| |
Schedule II
KKR Financial Holdings LLC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share information)
|
| As of |
| As of |
| ||
Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 196,526 |
| $ | 524,080 |
|
Restricted cash and cash equivalents |
| 855,791 |
| 1,067,797 |
| ||
Securities available-for-sale, $1,008,104 and $1,346,247 pledged as collateral as of September 30, 2008 and December 31, 2007, respectively |
| 1,023,276 |
| 1,359,541 |
| ||
Corporate loans, net of allowance for loan losses of $35,000 and $25,000 as of September 30, 2008 and December 31, 2007, respectively |
| 8,458,531 |
| 8,634,208 |
| ||
Residential mortgage-backed securities, at estimated fair value, $71,509 and $117,833 pledged as collateral as of September 30, 2008 and December 31, 2007, respectively |
| 112,980 |
| 131,688 |
| ||
Residential mortgage loans, at estimated fair value |
| 3,054,756 |
| 3,921,323 |
| ||
Corporate loans held for sale |
| 28,201 |
| — |
| ||
Derivative assets |
| 51,235 |
| 18,737 |
| ||
Interest and principal receivable |
| 115,005 |
| 162,465 |
| ||
Non-marketable equity securities |
| 17,505 |
| 20,084 |
| ||
Reverse repurchase agreements |
| 27,645 |
| 69,840 |
| ||
Other assets |
| 75,998 |
| 86,504 |
| ||
Assets of discontinued operations |
| — |
| 3,049,758 |
| ||
Total assets |
| $ | 14,017,449 |
| $ | 19,046,025 |
|
Liabilities |
|
|
|
|
| ||
Repurchase agreements |
| $ | — |
| $ | 2,808,066 |
|
Collateralized loan obligation senior secured notes |
| 7,549,672 |
| 5,948,610 |
| ||
Collateralized loan obligation junior secured notes to affiliates |
| 525,420 |
| 525,420 |
| ||
Secured revolving credit facility |
| 378,306 |
| 167,024 |
| ||
Secured demand loan |
| — |
| 24,151 |
| ||
Convertible senior notes |
| 300,000 |
| 300,000 |
| ||
Junior subordinated notes |
| 288,671 |
| 329,908 |
| ||
Subordinated notes to affiliates |
| 84,000 |
| 152,574 |
| ||
Residential mortgage-backed securities issued, at estimated fair value |
| 2,868,232 |
| 3,169,353 |
| ||
Accounts payable, accrued expenses and other liabilities |
| 27,821 |
| 7,390 |
| ||
Accrued interest payable |
| 56,901 |
| 114,035 |
| ||
Accrued interest payable to affiliates |
| 36,317 |
| 44,121 |
| ||
Related party payable |
| 5,071 |
| 9,694 |
| ||
Securities sold, not yet purchased |
| 83,507 |
| 100,394 |
| ||
Derivative liabilities |
| 82,968 |
| 56,663 |
| ||
Liabilities of discontinued operations |
| — |
| 3,644,083 |
| ||
Total liabilities |
| 12,286,886 |
| 17,401,486 |
| ||
Shareholders’ Equity |
|
|
|
|
| ||
Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding at September 30, 2008 and December 31, 2007 |
| — |
| — |
| ||
Common shares, no par value, 250,000,000 shares authorized, and 150,881,500 and 115,248,990 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively |
| — |
| — |
| ||
Paid-in-capital |
| 2,551,634 |
| 2,167,156 |
| ||
Accumulated other comprehensive loss |
| (377,924 | ) | (157,245 | ) | ||
Accumulated deficit |
| (443,147 | ) | (365,372 | ) | ||
Total shareholders’ equity |
| 1,730,563 |
| 1,644,539 |
| ||
Total liabilities and shareholders’ equity |
| $ | 14,017,449 |
| $ | 19,046,025 |
|
Schedule III
KKR Financial Holdings LLC
ECONOMIC INVESTMENT PORTFOLIO AS OF SEPTEMBER 30, 2008 (UNAUDITED)
(amounts in thousands) (1) |
| Amortized Cost |
| Estimated |
| Portfolio Mix |
| ||
Corporate loans (2)(3) |
| $ | 6,675,992 |
| $ | 5,684,674 |
| 83.3 | % |
Corporate debt securities (3) |
| 1,063,673 |
| 805,029 |
| 11.8 |
| ||
Residential mortgage-backed securities (4) |
| 361,755 |
| 310,361 |
| 4.5 |
| ||
Marketable equity securities |
| 17,322 |
| 5,577 |
| 0.1 |
| ||
Non-marketable equity securities |
| 17,505 |
| 17,505 |
| 0.3 |
| ||
Total |
| $ | 8,136,247 |
| $ | 6,823,146 |
| 100.0 | % |
(1) The table excludes securities sold, not yet purchased with a cost of $101.3 million and an estimated fair value of $83.5 million.
(2) Total corporate loans exclude the allowance for loan losses of $35.0 million and include corporate loans held for sale with an estimated fair value of $23.0 million.
(3) Represents corporate loans and debt securities adjusted to reflect the Company’s proportionate share of its investment of the Joint CLOs as further described above in the note regarding use of non-GAAP financial measurements. GAAP corporate loans and debt securities have an amortized cost of $8.5 billion and $1.4 billion, respectively, and estimated fair value of $7.2 billion and $1.0 billion, respectively.
(4) Represents residential mortgage-backed securities with a cost of $130.8 million and an estimated fair value of $113.0 million, plus the net difference between residential mortgage loans (cost of $3.5 billion and estimated fair value of $3.1 billion) and residential mortgage-backed securities issued (cost of $3.3 billion and estimated fair value of $2.9 billion) plus $10.9 million of real estate owned, which is included in other assets on the consolidated balance sheet.
Schedule IV
KKR Financial Holdings LLC
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASUREMENTS (UNAUDITED)
Economic Net Income
The reconciliation of economic net income to GAAP net income for the three and nine months ended September 30, 2008 and 2007 is as follows:
(amounts in thousands) |
| For the three months |
| For the three months |
| For the nine months |
| For the nine months |
| ||||
Economic net income |
| $ | 48,937 |
| $ | (265,910 | ) | $ | 101,494 |
| $ | (157,823 | ) |
Share-based compensation |
| 53 |
| 4,403 |
| (959 | ) | (2,289 | ) | ||||
GAAP net income |
| $ | 48,990 |
| $ | (261,507 | ) | $ | 100,535 |
| $ | (160,112 | ) |
Net Economic Leverage
The computation of net economic leverage as of September 30, 2008 is as follows:
(amounts in thousands) |
|
|
| |
Economic borrowings: |
|
|
| |
Collateralized loan obligation senior secured notes |
| $ | 5,977,278 |
|
Secured revolving credit facility |
| 378,306 |
| |
Convertible senior notes |
| 300,000 |
| |
Total economic borrowings excluding junior subordinated notes |
| 6,655,584 |
| |
Less: Economic unrestricted cash |
| (196,526 | ) | |
Total economic debt excluding junior subordinated notes and economic unrestricted cash (A) |
| $ | 6,459,058 |
|
|
|
|
| |
Total economic shareholders’ equity |
| $ | 1,818,853 |
|
Economic junior subordinated notes |
| 288,671 |
| |
Total economic shareholders’ equity including economic junior subordinated notes (B) |
| $ | 2,107,524 |
|
|
|
|
| |
Net economic leverage (A)/(B) |
| 3.1x |
| |