KKR Financial Plunges on Mortgage Losses

KKR Financial Holdings LLC, a unit of buyout giant Kohlberg Kravis Roberts & Co., said Wednesday it could lose over $200 million on leveraged investments in mortgage-backed securities, causing its shares to plunge 31% to $10.52. The stock is now down almost 58% over the past month. KKR said it sold about $5.1 billion in residential-mortgage loans, and unwound the derivatives used to hedge them, at a loss of about $40 million. KKR Financial still holds about $5.8 billion in mortgage loans, mainly residential-mortgage-backed securities, which it says it finances largely through short-term borrowing. It has only $200 million of its own equity supporting those positions, a leverage ratio of over 26:1. "Due to the unprecedented disruption in the residential-mortgage and global commercial-paper markets, the company has initiated discussions with the investors in its asset-backed secured liquidity note facilities regarding various alternatives to resolve potential funding disruptions resulting from the current market environment," the company said in a statement. It warned it could lose another $200-$250 million in its efforts to extricate itself from residential-mortgage securities. A Lehman research note said KKR Financial "should be able to navigate through the current liquidity crisis; however, we are concerned about the potential impact from wider credit spreads." Another analyst said he didn't believe the current issue will derail the parent company's planned IPO. At least 70 U.S. mortgage companies have halted operations or sought buyers since the start of 2006, Bloomberg reports.

Sources: Press release, MarketWatch, Bloomberg
Commentary: Time To Hold — Anything Else Could Be Hazardous To Your Portfolio's Health • Why Sub-Prime Doesn't Worry Me • Where is All the Money Going?
Stocks/ETFs to watch: KFN

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