KKR Financial To Raise About $500.4 Mln From Rights And Private Placement Of Shares

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Monday, mortgage lender KKR Financial Holdings LLC (KFN) said it would raise about $500.4 million through sale of stock to investment funds and its own shareholders as a measure to boost its cash position.

KKR would sell 16 million common shares at $14.40 per share to seven unaffiliated institutional investors. The buyers include certain funds managed by Farallon Capital Management, L.L.C., Fir Tree Partners, JGE Capital Management, Marsico Capital Management, Morgan Stanley, Oak Hill Advisors, and Sageview Capital L.P. Proceeds from the transaction total $230.4 million, the company said.

The San Francisco, California-based KKR would also issue 18.75 million common shares to its existing shareholders under a rights offering at $14.40 per share. The offering is expected to generate proceeds of about $270 million. Each holder of common shares would get 0.19430 rights for each common share held at the close of business on August 30. The rights offering would expire on September 19.

KKR would use the net proceeds of both the common stock offering and the rights offering for general corporate purposes.

The company has also entered in to a backstop commitment agreement with principals of Kohlberg Kravis Roberts & Co. L.P., pursuant to which principals of Kohlberg would buy about $100.0 million of common shares at $14.40 a share when the rights offering is not fully subscribed.

Nino Fanlo, KFN's Chief Executive Officer said, "KFN will use the capital to strengthen its balance sheet and ensure it is able to operate from a position of strength in these turbulent times. We are grateful for the support of the investor group and our partners at KKR."

The mortgage lending industry is struggling as defaults mount, investors refuse to buy many home loans, and bankers restrict lending to mortgage providers, sending dozens of lenders out of the industry this year, while several have gone bankrupt.

In order to weather the credit crunch in the industry, KKR said last week it sold residential mortgage loans worth $5.1 billion and terminated related interest rate swaps, which would result in a net loss of about $40 million. The company said it still holds mortgage loans worth $5.8 billion approximately in the form of residential mortgage-backed securities.

KKR Financial also said due to unprecedented disruption in the residential mortgage and global commercial paper markets, it may need to record a charge up to $200.0 million for the equity investment in the asset-backed liquidity note facilities. Additional charges in range of $0 to $50 million are also estimated.

Following the company's sale of residential mortgage loans, Friedman, Billings, Ramsey upgraded KKR Financial shares to Outperform from Market Perform. Analyst Merrill Ross believes that KKR's opportunities to invest in its core corporate lending business are better than ever in the current market.

Following the sale, KKR's total focus would be on its core business of corporate lending, which, in management's view currently offers the most attractive returns in the last 25 years. The analyst thinks that there is some, but relatively little downside risk to the current run-rate dividend, and he thinks that there is potential upside as the capital extracted from the RMBS portfolio sale is invested back into the core business.

KKR Financial shares gained $1.10 or 7.64% on Monday and currently trading at $15.50. For the past 52-weeks, the company's stock has been trading between $9.39 and $30.27.

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