I am sharing with you some of the key observations on KKR Financial Holdings (KFN), company that I had a short position in, but was covered some time ago. I would appreciate any info or insight that my readers may have on this company. I initially saw this company as the next Carlyle Capital or Peloton Holdings. In order to put on another position at these levels, I would have to assume a total equity wipeout , as was witnessed in the two aforementioned companies. We shall see...
On December 31, 2007, KFN's economic book value per share was $14.62 and fair value per share was $16.06. As of March 06, 2008, when the company held a conference call with the analysts, it highlighted that both economic book value and fair value per share are broadly in the range of on the low side, $13.50 per share, and on the high side, $14.50 per share.
Liquidity
On the liquidity front, at the end of December 31, 2007, KFN had $1.04 billion of available liquidity which included unrestricted cash and cash equivalents of $524.1 million, restricted cash available for investment worth $430.1 million and restricted cash available for debt service amounting to $85.5 million. As of March 06, 2008, it had free cash and cash equivalents approximating $400 million and restricted cash available for investment of just under $500 million. $100 million worth of liquidity lost in two months!
In terms funding capacity, KFN mentioned that it currently has $1.8 billion of capacity available under the non-recourse secure transaction executed in November 2007, $340 million available under secured credit facility, and an additional EUR800 million. However, in a recent filing with the SEC, KFN asked for more time to make payments to holders of the non-recourse secured liquidity notes that were issued by two of its asset-backed conduit facilities. This isn't the first time the company has run into trouble. Last year, it said the credit market turmoil was weighing on its ability to make payments on some of its asset-backed commercial paper. In October 2007, the company reached a pact to extend the maturity date of the secured liquidity notes so that roughly half of the principal was due on February 15, 2008 and the rest on March 13, 2008.
Note: Several people have brought up what appears to be an oversight in this posting. See the following:
There's one flaw in your argument => they've
already written down on their ABS/residential assets to zero (whatever they
haven't sold) and thus have no economic interest in them. The negotiations over the previous default
with commerical paper holders has to due with non-recourse debt and thus does
not impact KFN. When you securize assets
off you balance via a CDO and keep the equity, FIN 46 mandates you place the
CDO notes on your balance sheet even though you've "sold it".
Repo agreements with "Investment Banks"
KFN also mentioned that it has large warehouses which are structured as repo agreements with Goldman Sachs, Citigroup, J P Morgan Chase and Morgan Stanley.
Credit exposure to RMBS
Asset Backed Commercial Paper (ABCP) where they took a charge of $243 million for discontinued operations. That has underlying in it assets that are in excess of $3.5 billion. Apart from this, as of December 31, KFN held approximately $337 million of residential mortgage backed securities. These were AA to unrated pieces of which, approximately $288 million was rated investment grade and just under $50 million was below investment grade. They mentioned that these securities were the remnants of the whole loans that KFN bought from Wells Fargo and First Republic securitized with most of them being originated in 2004 and 2005 (FICO in the 730ish range and LTV's of 65-66). The cumulative static pool net losses on the underlying $10.5 billion of mortgages at the end of December 31, 2007 were 1.9 to 2 basis points. However, it may have gone up significantly with the worsening of the crisis and widening credit spreads.
The CEO had the following comment on the business in 2008: We had January was the second worst month in loan history after July of last year and then February came right after it and was the third worst figure in loan history.
I did not have enough time to go through the company's 10K and see if there are some discrepancies that can be looked into, but will follow up in a few days.
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