KKR Financial asks for $500m bail-out

US buyout giant Kohlberg Kravis Roberts has asked shareholders to invest a further $500 million in KKR Financial, its real estate investment arm, to offset difficulties caused by troubles in the US mortgage market.

US buyout firm Kohlberg Kravis Roberts has launched a $270 million (€200 million) rights issue and sold $230 million of shares to shore up its real estate investment arm KKR Financial, after losses relating to the US residential mortgage sector.

Seven institutions have bought the stock: Farallon Capital Management, Fir Tree Partners, JGE Capital Management, Marsico Capital Management, Morgan Stanley, Oak Hill Advisors, and Sageview Capital. Each is paying $14.40 per share, KKR Financial’s closing share price on 17 August.

There will also be a $270 million rights issue, with the vehicle hoping to sell an extra 18.75 million shares to existing shareholders, also at $14.40 each. Each holder of common shares will receive rights corresponding to a fifth of their current holding. If the offering is not fully subscribed KKR has said it will purchase $100 million of the shares itself.

Nino Fanlo, KKR Financial’s chief executive, said in a statement, “KKR Financial 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”.
KKR said last week it had lost $40 million through the sale of $5.1 billion in mortgage loans. It is also possible it will lose a further $250 million as it looks to sell out of residential mortgages.

The vehicle announced in May that it was converting from a real estate investment trust – which has to take 75 percent of its gross income from real estate assets – into a limited liability company. As a result it plans to sell the $5.8 billion of mortgage loans, mostly residential mortgage-backed securities, still on its books.

However, if it fails to reach agreement on this with the investors in its asset-backed liquidity notes, it could be left with a charge of up to $200 million, equivalent to its total equity investment in the securities, plus additional liabilities of up to $50 million.