Fitch Assigns Initial L-T IDR of 'BBB' to KKR Financial Holdings LLC; Outlook Stable

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an initial long-term Issuer Default Rating (IDR) of 'BBB' to KKR Financial Holdings LLC (KFN). The Rating Outlook is Stable.

The ratings of KFN are supported by its inherent linkage and strong relationship with the parent of its investment manager, KKR & Co. L.P. (KKR; rated with an IDR of 'A' by Fitch), which has demonstrated implicit and explicit support of the company in recent years. Implicit support is evidenced by KFN's use of the KKR brand, while explicit support is evidenced by KKR backstopping an equity underwriting for KFN, providing it with a liquidity facility, and deferring a portion of management fees owed to its subsidiary during the crisis.

Other factors supporting KFN's rating include its experienced management team, the reduction of balance sheet risk in recent years with the removal of mark-to-market financing, relatively low leverage, improved credit trends and operating consistency, solid liquidity, and a demonstrated ability to access the equity markets for growth capital.

Rating constraints include the largely secured funding profile, with a heavy reliance on CLO funding historically, the presence of some issuer concentrations within the corporate debt portfolio, a lack of revenue diversity, the capital markets impact on leverage given the requirement to fair value the loan portfolio on a quarterly basis, and intense competition in the space in which the company invests.

The Stable Outlook reflects Fitch's expectation that KFN will continue to report solid asset quality and relatively consistent core operating performance over the intermediate term, while maintaining low leverage and solid liquidity, even with anticipated declines in the fair value of portfolio investments given recent volatility in the capital markets. The Outlook also incorporates the expectation that KKR's willingness and ability to support KFN, as needed, will remain unchanged.

Positive rating momentum could result from declines in leverage, improved funding flexibility, and stronger liquidity. Conversely, higher leverage, deterioration in asset quality, weaker core earnings performance, outsized portfolio losses, declines in liquidity, and/or a change in Fitch's view of the relationship between KFN and KKR could yield negative rating actions.

KFN is a specialty finance company with expertise in a range of asset classes. KFN's core business strategy is to leverage the proprietary resources of its manager with the objective of generating both current income and capital appreciation by deploying capital to its strategies, which include bank loans and high yield securities, mezzanine, special situations, natural resources, commercial real estate and private equity.

KFN is externally managed and advised by KKR Financial Advisors LLC (KFA), a wholly owned subsidiary of KKR Asset Management LLC (KAM), which is a wholly owned subsidiary of KKR. KFA receives a monthly base management fee equal to 1/12 of KFN equity multiplied by 1.75%, in addition to a quarterly incentive fee if return hurdles are met.

Fitch has assigned the following rating:

KKR Financial Holdings LLC

-- Long-term Issuer Default Rating (IDR) 'BBB'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

-- 'Global Financial Institutions Criteria' (Aug. 16. 2011);

--'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=649171

Investment Manager and Alternative Funds Criteria

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

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