KKR Financial Holdings LLC Announces Third Quarter 2012 Financial Results and a Quarterly Distribution of $0.21 per Common Share

SAN FRANCISCO, Oct. 25, 2012 /PRNewswire/ -- KKR Financial Holdings LLC (NYSE: KFN) ("KFN" or the "Company") today announced its results for the third quarter ended September 30, 2012.

Third Quarter 2012 Highlights

  • Net income for the third quarter ended September 30, 2012 totaled $112.0 million, or $0.61 per diluted common share.
  • Quarterly cash distribution of $0.21 per common share declared for the third quarter of 2012.
  • Book value per common share was $10.09 as of September 30, 2012.

For the three and nine months ended September 30, 2012, KFN reported net income of $112.0 million, or $0.61 per diluted common share, and $271.2 million, or $1.48 per diluted common share, respectively. Comparatively, for the three and nine months ended September 30, 2011, KFN reported net income of $39.8 million, or $0.22 per diluted common share, and $241.1 million, or $1.32 per diluted common share, respectively.

KFN's third quarter 2012 results included net investment income of $90.0 million, other income of $73.3 million and non-investment expenses of $51.0 million. Comparatively, KFN's third quarter 2011 results reflected net investment income of $86.6 million, other loss of $29.3 million and non-investment expenses of $17.9 million.

Other income for the third quarter of 2012 totaled $73.3 million and primarily consisted of $72.4 million of net realized and unrealized gains on investments.  These were largely composed of realized gains from the disposition of certain high yield bond holdings, as continued credit spread tightening in both the high yield and leveraged loan markets drove asset prices higher during the quarter.

"KFN's results are reflective of a strong credit environment with continually tightening spreads. Recognizing this, we divested certain subordinated high yield securities which had achieved our targeted values and deployed the proceeds further up capital structures to enhance KFN's risk-adjusted returns," said William C. Sonneborn, the Company's Chief Executive Officer.  "I am pleased with our performance and the new opportunities in which we participated during the quarter across our strategies."

Selected Portfolio Activity

Bank Loans and High Yield Strategy

Based on the continued credit spread tightening that transpired during the third quarter, the Company reduced its high yield bond portfolio primarily held through CLO subsidiaries from a par amount of $743.7 million as of June 30, 2012 to $500.5 million as of September 30, 2012. These sales generated net realized gains during the quarter of approximately $40.8 million.

Mezzanine Strategy

During the third quarter of 2012, the Company deployed approximately €41.1 million to two Northern European mezzanine opportunities. The €41.1 million capital deployed consists of €39.5 million to mezzanine debt with a 16% yield and €1.6 million to equity.

Natural Resources Strategy

During the third quarter of 2012, the Company participated in two incremental opportunities through its natural resources strategy whereby the Company will provide capital to third-party operators for drilling new wells in exchange for working interests in their developed wells and undeveloped acreage.  During the quarter, the Company made initial capital deployments totaling $24.8 million to these two transactions.

Commercial Real Estate Strategy

During the third quarter of 2012, the Company participated in two joint venture transactions through its commercial real estate strategy.  The first consists of a joint venture formed to develop Pinto Business Park, a 971-acre master-planned business park located in Houston, Texas. The second transaction is a joint venture to develop single-family finished lots and multi-family housing in a location adjacent to a major U.S. shale formation. During the third quarter, the Company made initial capital deployments totaling $8.0 million to these two transactions.

Book Value

Book value per share increased to $10.09 as of September 30, 2012 from $9.79 as of June 30, 2012. The increase in book value per share from June 30, 2012 was primarily driven by the Company's earnings for the third quarter of $0.63 per basic common share.

Distributions

On October 25, 2012, the Company's board of directors declared a cash distribution of $0.21 per common share. The distribution is payable on November 21, 2012 to common shareholders of record as of the close of business on November 7, 2012.

Information for Investors: Conference Call and Webcast

The Company will host a conference call and audio webcast to review its results for the third quarter ended September 30, 2012 on October 25, 2012, at 2:00 p.m. PT (5:00 p.m. ET). The conference call may be accessed by dialing (877) 303-4382 (domestic) or +1 (253) 237-1193 (international); a pass code is not required.  A telephonic replay of the call will be available through November 8, 2012 by dialing (855) 859-2056 (domestic) and +1 (404) 537-3406 (international), pass code 37885673. Supplemental materials that will be discussed during the call and the live audio webcast 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 webcast 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. 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, 2011, filed with the SEC on February 28, 2012.

Schedule I

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, 2012


For the three

months ended

September 30, 2011


For the nine

months ended

September 30, 2012


For the nine

months ended

September 30, 2011

Net investment income:









Loan interest income


$

101,988


$

104,197


$

313,684


$

316,498

Securities interest income


18,791


20,143


62,180


64,772

Oil and gas revenue


21,487


9,963


44,262


19,458

Other investment income


1,068


137


1,692


4,885

Total investment income


143,334


134,440


421,818


405,613

Interest expense


40,418


32,604


123,788


97,703

Interest expense to affiliates


12,954


12,688


38,131


38,926

Provision for loan losses



2,533


46,498


14,194

Net investment income


89,962


86,615


213,401


254,790

Other income (loss):









Net realized and unrealized gain (loss) on investments


72,440


(24,531)


154,410


73,194

Net realized and unrealized loss on derivatives and foreign exchange


(8,102)


(7,603)


(2,583)


(295)

Net realized and unrealized gain on residential  mortgage-backed securities, at estimated fair value


3,624


2,274


9,687


2,145

Net loss on restructuring and extinguishment of debt



(1,736)


(445)


(1,736)

Other income


5,371


2,290


10,664


6,400

Total other income (loss)


73,333


(29,306)


171,733


79,708

Non-investment expenses:









Related party management compensation


26,602


8,198


57,519


53,714

General, administrative and directors expenses


23,282


8,554


55,612


27,092

Professional services


1,130


1,134


4,334


4,257

Total non-investment expenses


51,014


17,886


117,465


85,063

Income before income tax expense (benefit)


112,281


39,423


267,669


249,435

Income tax expense (benefit)


317


(397)


(3,548)


8,344

Net income


$

111,964


$

39,820


$

271,217


$

241,091










Net income per common share:









Basic


$

0.63


$

0.22


$

1.52


$

1.35

Diluted


$

0.61


$

0.22


$

1.48


$

1.32










Weighted-average number of common shares outstanding:









Basic


177,862


177,723


177,815


177,493

Diluted


183,431


180,220


182,440


181,304



























 

Schedule II

KKR Financial Holdings LLC

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share information)









September 30,

2012


December 31,

2011

Assets





Cash and cash equivalents


$

331,366


$

392,154

Restricted cash and cash equivalents


735,099


399,620

Securities


570,511


922,603

Corporate loans, net (includes $137,946 and $317,332 loans held for sale as of September 30, 2012 and December 31, 2011, respectively)


5,845,421


6,443,399

Equity investments, at estimated fair value ($20,129 and $12,222 pledged as collateral as of September 30, 2012 and December 31, 2011, respectively)


194,624


189,845

Derivative assets


23,348


28,463

Interest and principal receivable


32,725


62,124

Other assets


522,058


209,020

Total assets


$

8,255,152


$

8,647,228

Liabilities





Collateralized loan obligation secured debt


$

5,013,433


$

5,540,037

Collateralized loan obligation junior secured notes to affiliates


296,857


365,848

Credit facilities


107,789


38,300

Convertible senior notes


165,697


299,830

Senior notes


362,155


250,676

Junior subordinated notes                                                         


283,517


283,517

Accounts payable, accrued expenses and other liabilities


57,165


24,680

Accrued interest payable


18,089


25,536

Accrued interest payable to affiliates


6,856


6,561

Related party payable


21,752


11,078

Derivative liabilities


121,417


125,333

Total liabilities


6,454,727


6,971,396

Shareholders' Equity





Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding at September 30, 2012 and December 31, 2011



Common shares, no par value, 500,000,000 shares authorized, and 178,437,078 and 178,145,482 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively



Paid-in-capital


2,761,640


2,759,478

Accumulated other comprehensive loss


(68,438)


(35,619)

Accumulated deficit


(892,777)


(1,048,027)

Total shareholders' equity


1,800,425


1,675,832

Total liabilities and shareholders' equity


$

8,255,152


$

8,647,228















 

Investor Relations Contact:
Pam Testani
+1 (415) 315-6597 
investor-relations@kkr.com

Media Contact:
Kristi Huller
+1 (212) 750-8300
media@kkr.com

SOURCE KKR Financial Holdings LLC



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