KKR Financial says it has "ample liquidity"

By Jessica Hall

PHILADELPHIA (Reuters) - KKR Financial Holdings LLC (KFN.N) said on Wednesday it believed it had "ample liquidity" to fund its core business and it would maintain a funding cushion during the current downturn in U.S. credit markets.

The affiliate of leveraged buyout firm Kohlberg Kravis Roberts & Co KKR.UL said it had $452 million in liquidity to meet "any and all" investment opportunities or business contingencies, such as margin calls, that may arise.

KKR Financial, whose stock dropped 31 percent on Wednesday, said it had up to $1.2 billion in debt with some margin triggers. A margin call requires the buyer of securities with borrowed money to deposit additional money in the account or sell some assets.

"We have to assume the world is different. We may have to meet some margins," KKR Financial Chief Executive Saturnino Fanlo said on a conference call with investors and media. "We assume we should keep some liquidity."

While the credit crisis may have a limited effect on KKR Financial, Fanlo called it "the most disturbing liquidity crisis around the economy if it does not rectify."

Earlier on Wednesday, KKR Financial said it would lose about $40 million from selling $5.1 billion in residential mortgages. It warned an additional $200 million hit could be coming, though that would be its maximum expected exposure.

KKR Financial blamed the estimated $40 million loss on "unprecedented disruptions" in the U.S. residential mortgage market, which have reverberated to banks in Europe and Asia.

The company said it sold the real estate portfolio as part of its conversion from a real estate investment trust to a limited liability company.

"Our core business -- our ability to invest in corporate debt -- is performing well," KKR Financial Chief Financial Officer Jeffrey Van Horn said on the conference call.

KKR Financial said it was taking advantage of the credit market turbulence to invest in corporate debt. In the past few weeks, it has bought $500 million in corporate debt at an average price of 94.5 cents on the dollar, Van Horn said.

"The disruptions in the corporate debt market continue to provide extremely attractive opportunities," Van Horn said. "It is our intention to deploy capital released from the sale of our mortgages into these core opportunities."

KKR Financial, which has said return on equity from its core debt business is about 20 percent, said current market conditions offer opportunities for it to exceed that.

Of its $452 million in liquidity, KKR Financial said it planned to keep roughly half for defensive moves such as paying off debt or maintaining a cash stockpile.

"I think in the environment we're in, we're going to play more defense than normal," Van Horn said. "A couple-hundred million dollars would be defense."

Despite the 31 percent drop in its shares, KKR Financial said it was unlikely it would buy back shares. It said it would maintain a "very high" dividend, but did not elaborate.