Fitch Affirms KKR's L-T IDR at 'A'; Outlook Remains Stable

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of KKR & Co. L.P. (KKR) and its related subsidiaries at 'A'. The Rating Outlook is Stable. Approximately $500 million of unsecured debt is affected by these actions. A complete list of ratings is detailed at the end of this release.

The ratings affirmation reflects KKR's position as a global asset manager, experienced management team, solid investment track record, large institutional investor base, predictable fee-earning capabilities, given sizeable fee-paying assets under management (FAUM), and the potential for significant incentive income. The ratings also reflect the joint and several guarantees on unsecured indebtedness at finance subsidiaries by KKR Management Holdings L.P. and KKR Fund Holdings L.P., in addition to the subordination of general partner (GP) interests to outstanding indebtedness of the consolidated company.

Ratings are constrained by 'key man' risk, although Fitch believes policies are less punitive than peers, reputational risk, which can impact the company's ability to raise future funds, and legal and regulatory risk, which could alter the alternative asset space.

FAUM, which aggregates all assets which garner a management fee, amounted to $45.7 billion at March 31, 2011, up 7.5% year over year, due to capital inflows and positive valuation movements in certain credit vehicles, offset to some extent by an increase in distributions to limited partners, driven by realization activity. The vast majority of management fees are based on committed and/or invested capital, which does not fluctuate with fair value movements. Therefore, Fitch believes KKR has a very predictable management fee earnings stream, which can be used to service outstanding debt. The company also receives a portion of the monitoring and transaction fees generated from fund investments, although this revenue source can be lumpy depending on deal volume and contract terminations.

Fitch monitors fee-related earnings as a measure of operating performance. This metric is calculated as management fees plus net monitoring and transaction fees less base compensation and benefits less operating expenses. All incentive fees, including those earned from KKR Financial Holdings LLC (KFN) are excluded. Fee-related earnings grew 39.6% in 1Q'11 from 1Q'10, driven largely by an increase in monitoring and transaction fees, due to the recognition of $37.8 million of contract termination payments related to two portfolio company investments and higher capital markets activity. Carry and investment income rose 5.7% due to a decline in management fee refunds and a continuation of strong portfolio valuation trends. The fee-related earnings margin was 51.7%, which is above the historical range. Fitch expects a continuation of solid operating performance over the balance of the year, supported in part by further capital inflows, but monitoring and transaction fees are expected to remain lumpy.

KKR's leverage, as measured by long-term corporate debt divided by fee-related earnings-EBITDA (FEBITDA), continued to decline with growth in cash flow and declines in debt outstanding. Leverage was 1.07 times (x), on an annualized basis in 1Q'11, or 1.52x on a trailing 12 month (TTM) basis, which is down significantly from 2.9x at YE09, and compares favorably to other alternative asset managers. Debt service coverage, as measured by FEBITDA divided by interest expense, was 10.9x, annualized in 1Q'11, or 11.3x on a TTM basis, which is up from 6.9x at YE09.

Fitch believes KKR has a solid liquidity profile, with $1.05 billion of cash and equivalents and $1.56 billion of revolver capacity. The primary use of liquidity includes the funding of unfunded capital commitments to its investment funds, potential clawbacks, net loss sharing provisions, dividends, and operating expenses. At the end of the first quarter, KKR had $865 million of unfunded capital commitments to its funds, but Fitch believes the company has some control over the timing of its capital calls. The clawback obligation and net loss sharing provision KKR would need to fund if its PE investments were liquidated at fair value at 1Q'11, amounted to $73.5 million and zero, respectively, down from $84.9 million and $93.6 million at year-end 2009 due to improvements in valuation. Fitch believes the likelihood of having to fund these commitments is remote, however, the absolute dollar value is deemed manageable and reserves are held against the potential obligation. KKR's dividend policy is to distribute excess cash earnings on a quarterly basis, excluding gains on balance sheet investments, but there is significant management discretion in the definition of excess cash.

The Stable Outlook reflects Fitch's expectation that KKR will continue to generate consistent management fees and fee-related earnings, grow FAUM through follow-on funds and expansion into new fixed income products, manage leverage ratios near the current range, and maintain a solid liquidity profile. Negative rating action could be driven by declines in investment performance which negatively impacts the company's ability to raise FAUM and generate fees, meaningful increases in leverage and/or impairment of the liquidity profile. Positive rating momentum could be driven by an increase in fund and fee diversity and reductions in leverage.

Founded in 1976, KKR is one of the largest alternative asset managers in the world with $61 billion of assets under management and $45.7 billion of FAUM at March 31, 2011. Since its inception, the company has completed more than 190 PE investments with a total transaction value in excess of $440 billion. On July 15, 2010, the company moved its listing to the New York Stock Exchange and trades under the ticker 'KKR'.

Fitch has affirmed the following ratings with a Stable Outlook:

KKR & Co. L.P.

--Long-term IDR at 'A'.

KKR Management Holdings L.P.

--Long-term IDR at 'A'.

KKR Fund Holdings L.P.

--Long-term IDR at 'A'.

KKR Group Finance Co. LLC

--Long-term IDR at 'A';

--Senior unsecured debt at 'A'.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Global Financial Institutions Criteria' (Aug. 16. 2010); --'Investment Manager and Alternative Funds Criteria' (Dec. 23, 2010).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685

Investment Manager and Alternative Funds Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=590125

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