KKR Financial Holdings LLC Announces Fourth Quarter and Full Year 2011 Financial Results and a Quarterly Distribution of $0.18 per Common Share and an Annual Special Distribution of $0.08 per Common Share

SAN FRANCISCO, Feb. 6, 2012 /PRNewswire/ -- KKR Financial Holdings LLC (NYSE: KFN) ("KFN" or the "Company") today announced its results for the fourth quarter and year ended December 31, 2011.

Fourth Quarter and Full Year 2011 Highlights

  • Net income for the fourth quarter and year ended December 31, 2011 totaled $77.0 million, or $0.43 per diluted common share, and $318.1 million, or $1.75 per diluted common share, respectively.
  • Declared a quarterly cash distribution of $0.18 per common share for the fourth quarter of 2011 and an annual special cash distribution of $0.08 per common share for the year ended December 31, 2011.
  • Book value per common share of $9.41 as of December 31, 2011 as compared to book value per common share of $9.14 as of September 30, 2011 and $9.24 as of December 31, 2010.
  • Completed a $258.8 million 30-year 8.375% senior note offering that generated $250.7 million of net proceeds for the Company.

For the fourth quarter and full year ended December 31, 2011, KFN reported net income of $77.0 million, or $0.43 per diluted common share, and $318.1 million, or $1.75 per diluted common share, respectively. Comparatively, for the fourth quarter and year ended December 31, 2010, KFN reported net income of $78.2 million, or $0.48 per diluted common share, and $371.1 million, or $2.32 per diluted common share, respectively.

KFN's fourth quarter 2011 results included net investment income of $90.0 million, other income of $13.7 million and non-investment expenses of $27.1 million. Comparatively, KFN's fourth quarter 2010 results reflected net investment income of $81.0 million, other income of $22.4 million and non-investment expenses of $25.0 million. Net investment income increased $9.0 million from the fourth quarter ended December 31, 2010 to 2011 primarily due to an increase in net revenue earned on the Company's working and royalty interests in oil and gas properties of $10.0 million, as well as the absence of a provision for loan losses recorded in the fourth quarter of 2010. These two factors were partially offset by a reduction in accelerated accretion income, included in loan and securities interest income, from prepayments on the Company's corporate debt portfolio of $14.2 million. Other income decreased $8.7 million from the fourth quarter ended December 31, 2010 to 2011 primarily due to a reduction in net realized and unrealized gains on investments of $9.7 million.  

KFN's results for the full year ended December 31, 2011 included net investment income of $344.8 million, other income of $93.4 million and non-investment expenses of $112.1 million. Comparatively, KFN's results for the year ended December 31, 2010 included net investment income of $319.4 million, other income of $143.4 million and non-investment expenses of $91.0 million. The $25.4 million year over year increase in net investment income was primarily driven by an increase in net revenue earned on the Company's oil and gas properties of $28.8 million. Correspondingly, the $21.2 million increase in non-investment expenses year over year was primarily driven by expenses incurred on the Company's oil and gas properties, including acquisition related costs, of $20.2 million during 2011. Other income for the year ended December 31, 2010 compared to 2011 decreased $49.9 million primarily due to an aggregate one-time gain on extinguishment of debt totaling $38.7 million recorded during 2010, related to the purchase of certain mezzanine and subordinated notes issued by two of the Company's CLO subsidiaries.

Portfolio Activity

Natural Resources Strategy

During the fourth quarter of 2011, the Company deployed or committed to deploy approximately $120 million of capital to three transactions through the Company's natural resources strategy. The first was an approximate $65 million investment in a joint venture with Quicksilver Resources to form a midstream partnership dedicated to the acquisition of existing pipelines, and construction and operation of additional natural gas midstream pipelines and treatment facilities in the Horn River basin in Western Canada. This investment carries with it a 15% contractual return including return of principal over ten years plus the terminal value in year ten of the pipelines and treatment plant.

Second, during the fourth quarter of 2011, the Company committed approximately $70 million to acquire working interests in conventional oil and gas properties located in East Texas, Louisiana and Mississippi. The assets consist of interests in over 625 active producing wells across over 48,000 acres in over 20 distinct fields. The acquisition of these working interests was completed in January 2012 and was partially funded with approximately $41.5 million of cash and $28.5 million of borrowings through the Company's non-recourse asset-based natural resources credit facility.

Finally, during the fourth quarter of 2011, the Company deployed $15.0 million of capital to acquire a private equity investment in Samson Investment Company, one of the largest private exploration and production companies in the United States.

Special Situations Strategy

During the fourth quarter of 2011, the Company deployed or committed to deploy approximately $45 million to several different special situations distressed opportunities, predominantly in Europe. In addition, during the quarter, the Company recorded a $5.0 million gain from the exit of a $13.6 million special situations investment made in the distressed senior debt of an Australian headquartered scrap metal recycling business. The $5.0 million gain combined with interest income received during the holding period of the debt resulted in a 75% internal rate of return from the date of acquisition in March 2011 through the exit date.

Senior Notes Offering

During the fourth quarter ended December 31, 2011, following the receipt of a BBB rating from Fitch Ratings and a BBB- rating from Standard & Poor's, the Company issued $225.0 million par amount of 8.375% Senior Notes due November 15, 2041 ("8.375% Notes"), resulting in net proceeds of $218.0 million. The Company also granted the underwriters an option to purchase up to an additional $33.8 million par amount of 8.375% Notes solely to cover over-allotments, which was exercised in full, resulting in net proceeds of $32.7 million. The total net proceeds from this offering of $250.7 million will be used to repurchase or repay a portion of the Company's existing senior indebtedness and for general corporate purposes. 

Book Value

Book value per share increased to $9.41 from $9.14 as of September 30, 2011 and $9.24 as of December 31, 2010. The increase in book value per share from September 30, 2011 was primarily driven by the Company's earnings for the fourth quarter of $0.43 per diluted common share, primarily offset by the Company's distribution to shareholders for the third quarter of 2011 of $0.18 per common share.

Distributions

On February 2, 2012, the Company's board of directors declared a cash distribution of $0.18 per common share for the quarter ended December 31, 2011. The distribution is payable on March 1, 2012 to common shareholders of record as of the close of business on February 16, 2012.

In addition, on February 2, 2012, the Company's board of directors declared an annual special distribution of $0.08 per common share for the year ended December 31, 2011. The distribution is payable on March 29, 2012 to common shareholders of record as of the close of business on March 15, 2012. Consistent with the Company's distribution policy, the Company's board of directors considered a number of factors in determining to declare this special distribution, including current market conditions, existing restrictions in the Company's borrowing agreements, the amount of ordinary taxable income or loss earned by the Company, gains or losses the Company recognized on the disposition of assets and the Company's liquidity.

Information for Investors: Conference Call and Webcast

The Company will host a conference call and audio webcast to review its results for the fourth quarter ended December 31, 2011 on February 6, 2012, at 2:00 p.m. PT (5:00 p.m. ET). The conference call may be accessed by dialing (888) 215-6894 (Domestic) or +1 (913) 981-4905 (International); a pass code is not required. A telephonic replay of the call will be available through February 20, 2012 by dialing (888) 203-1112 (Domestic) and +1 (719) 457-0820 (International) / pass code 6184837. Supplemental materials that will be discussed during the call and the live audio web cast will be available in the Investor Relations section of the Company's website at http://ir.kkr.com/kfn_ir/kfn_events.cfm. An audio replay of the web cast will be archived in the Investor Relations section of the Company's website at http://ir.kkr.com/kfn_ir/kfn_events.cfm.

From time to time the Company may use its website as a channel of distribution of material company information. Financial and other important information regarding the Company is routinely posted on and accessible at the Investor Relations section for KFN at www.kkr.com. In addition, you may automatically receive email alerts and other information about the Company by enrolling your email by visiting the "Email Alerts" area in KFN's Investor Relations section.

About KKR Financial Holdings LLC

KKR Financial Holdings LLC is a specialty finance company with expertise in a range of asset classes. KFN's core business strategy is to leverage the proprietary resources of its manager with the objective of generating both current income and capital appreciation. KFN executes its core business strategy through its majority-owned subsidiaries. KFN is externally managed by KKR Financial Advisors LLC, a wholly-owned subsidiary of KKR Asset Management LLC, which is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P.  Additional information regarding KFN is available at http://www.kkr.com.

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995: This press release contains 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, including statements with regards to the use of proceeds from the Company's debt offering in the quarter ended December 31, 2011. These forward-looking statements are based on information available to the Company as of the date of this press release and actual results may differ. These forward-looking statements involve known and unknown risks, uncertainties and other factors beyond the Company's control. Any forward-looking statements speak only as of the date of this press release and the Company expressly disclaims any obligation to update or revise any of them to reflect actual results, any changes in expectations or any change in events. If the Company does update one or more forward-looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements. For additional information concerning risks, uncertainties and other factors that may cause actual results to differ from those anticipated in the forward-looking statements, and risks to the Company's business in general, please refer to the Company's SEC filings, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on February 28, 2011 and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed with the SEC on November 3, 2011.

Schedule I

KKR Financial Holdings LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in thousands, except per share information)



For the three months ended December 31, 2011

For the three months ended December 31, 2010

For the year ended December 31, 2011

For the year ended December 31, 2010

Net investment income:





Loan interest income

$101,644

$114,822

$418,142

$397,634

Securities interest income

23,079

25,328

87,851

104,395

Other investment income

11,685

1,244

36,028

3,330

Total investment income

136,408

141,394

542,021

505,359

Interest expense

35,906

31,298

133,609

131,700

Interest expense to affiliates

10,532

8,080

49,458

25,152

Provision for loan losses

21,034

14,194

29,121

Net investment income

89,970

80,982

344,760

319,386

Other income:





Net realized and unrealized gain on investments

15,761

25,506

88,955

108,553

Net realized and unrealized loss on derivatives and foreign exchange

(3,517)

(1,257)

(3,812)

(4,694)

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

680

(3,632)

2,825

(11,396)

Net (loss) gain on restructuring and extinguishment of debt

(1,736)

39,999

Other income

815

1,805

7,215

10,890

Total other income

13,739

22,422

93,447

143,352

Non-investment expenses:





Related party management compensation

14,471

16,607

68,185

69,125

General, administrative and directors expenses

10,649

6,389

37,741

16,516

Professional services

1,941

1,996

6,198

5,331

Total non-investment expenses

27,061

24,992

112,124

90,972

Income from before income tax expense

76,648

78,412

326,083

371,766

Income tax (benefit) expense

(333)

213

8,011

702

Net income

$76,981

$78,199

$318,072

$371,064

Net income per common share:





Basic

$0.43

$0.48

$1.79

$2.33

Diluted

$0.43

$0.48

$1.75

$2.32

Weighted average number of common shares outstanding:





Basic

177,759

160,662

177,560

157,936

Diluted

179,675

163,173

180,897

158,771




Schedule II

KKR Financial Holdings LLC

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share information)



December 31, 2011

December 31, 2010

Assets



Cash and cash equivalents

$392,154

$313,829

Restricted cash and cash equivalents

399,620

571,425

Securities

922,603

932,823

Corporate loans, net (includes $317,332 and $463,628 loans held for sale as of December 31, 2011 and December 31, 2010, respectively)

6,443,399

6,321,444

Equity investments, at estimated fair value ($12,222 and $12,036 pledged as collateral as of December 31, 2011 and December 31, 2010, respectively)

189,845

99,955

Derivative assets

28,463

19,519

Interest and principal receivable

62,124

57,414

Other assets

209,020

102,003

Total assets

$8,647,228

$8,418,412

Liabilities



Collateralized loan obligation secured notes

$5,540,037

$5,630,272

Collateralized loan obligation junior secured notes to affiliates

365,848

366,124

Credit facilities

38,300

18,400

Convertible senior notes

299,830

344,142

Senior notes

250,676

Junior subordinated notes

283,517

283,517

Accounts payable, accrued expenses and other liabilities

24,680

14,193

Accrued interest payable

25,536

22,846

Accrued interest payable to affiliates

6,561

6,316

Related party payable

11,078

12,988

Derivative liabilities

125,333

76,566

Total liabilities

6,971,396

6,775,364

Shareholders' Equity



Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding at December 31, 2011 and December 31, 2010

Common shares, no par value, 500,000,000 shares authorized, and 178,145,482 and 177,848,565 shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively

Paid-in-capital

2,759,478

2,756,200

Accumulated other comprehensive (loss) income

(35,619)

133,596

Accumulated deficit

(1,048,027)

(1,246,748)

Total shareholders' equity

1,675,832

1,643,048

Total liabilities and shareholders' equity

$8,647,228

$8,418,412




Investor Relations Contact:
Angela Yang
415-315-6567
investor-relations@kkr.com

Media Contact:
Kristi Huller
212-750-8300
media@kkr.com

SOURCE KKR Financial Holdings LLC



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