KKR's Double Whammy

by: Judy Weil

KKR affiliate KKR Financial (KFN) invests primarily in leveraged loans (those used for buyouts). The value of those loans has fallen considerably this year, but the company said on its Q308 earnings call that it had secured new credit facilities to obtain greater financial flexibility. KFN maintains that the revolvers would enable KKR to take advantage of opportunities that it was seeing in the marketplace, but was passing on because of liquidity concerns. However, the terms of the loans seem to make the prospect of acquisitions prohibitively expensive.

From KKR Financial Corp.'s Q308 conference call:

The two new facilities consisted of $300 million senior secured asset-based revolving credit facility provided by Bank of America (NYSE:BAC) and Citibank (NYSE:C) and we're grateful to them, and a $100 million unsecured standby credit line provided by our manager.

In today's environment obtaining any financing is actually a remarkable achievement, and we are very pleased we were able to execute these transactions albeit at a significantly higher cost than financing transactions we have been able to execute prior to the current financial crisis in the market… The facility bears interest at a rate of LIBOR plus 3%.

[The] unsecured standby revolving credit facility with our manager… provides us with the ability to have an extra source of liquidity to utilize again, if needed, as we reduce the borrowings outstanding under our current credit facility. This agreement matures in December 2010, and bears interest at the rate of LIBOR plus 15%

Further, Bloomberg reported Tuesday, that some of the largest U.S. endowment funds are increasing their secondary sales of private equity fund stakes to more than $100 billion. Sources say stakes in funds managed by KKR Private Equity (KPE.AS) and other private equity outfits are being offered at more than 50% off.

KFN (below) is not referring here to endowment deleveraging, but it maintains that the deleveraging process for debt is subsiding:

Clearly today's prices are a function of not only difficult credit fundamentals but extraordinary market technicals. The equity markets are priced at a level reflecting a recession. However, credit is priced at a level assuming a depression.

There was a tremendous amount of deleveraging by the hedge fund community and the mutual fund community at September 30, and then after… And we have actually seen that stabilize over the last couple of weeks and start to turnaround.

What we actually see happening now is the smaller less liquid names finally adjusting in prices. So we have reason to be mildly optimistic that the deleveraging that occurred at the end of the third quarter is behind us. That is not to mean that we don't expect to see a smaller wave here as we go through the end of the fourth quarter.

But we have also seen a number of nontraditional participants jump into this market. Distressed folks are buying it. We continue to see private equity shops buy it. The asset class is extremely cheap and is drawing in many new investors. I think that will bode well for us given the fact that we're in the very large flow names.

Both KPE.AS and KFN are affiliates of parent company KKR, which is one of KFN's lenders as noted above. With its publicly-traded affiliates struggling in the face of endowment fund deleveraging and debt value erosion, it would appear that KKR might be in for more turbulence. WSJ has also noted that KFN is invested in some of the debt of KKR-owned companies, such as semiconductor outfit NXP and Texas utility TXU (TXU).