February 20, 2008 1:32 am

KKR arm in talks after fresh repayment delays

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KKR Financial Holdings, the listed affiliate of the private equity group, has delayed repayment of billions of dollars of commercial paper for the second time and begun a new round of restructuring talks with creditors less than six months after a rescue rights issue.

In a regulatory filing on Tuesday, KKR Financial Holdings (KFN) said it had begun talks with creditors and deferred repayment of a chunk of debt due last Friday. The move is a further embarrassment for KKR, following a $270m bail-out of the leveraged investment vehicle last September, which saw founders Henry Kravis and George Roberts personally inject cash.

KFN is a leveraged investment vehicle that had borrowed in the commercial paper markets to invest in home loans, particularly the “Alt-A” loans seen as riskier than mainstream borrowers but safer than subprime loans. Like other mortgage-backed securities, Alt-A loans have been hard-hit by the credit squeeze and US house price falls.

Last week, Standard & Poor’s, the credit rating agency, downgraded KKR Pacific, one of the two funding vehicles for KFN, by two notches to A-3 because of falls in the value of the mortgages.

KFN is one of many borrowers hit by the seizing-up of the asset-backed commercial paper market. But, unlike most similar borrowers, KFN used extendible commercial paper known as secured liquidity notes, which allowed it last October to defer payment of half its borrowings to February 15 and the rest to March 13.

On Tuesday KFN put off February repayments until March 3, but warned that most investors had the right to demand their money back with one day’s written notice.

KFN’s statement gave few details of its restructuring talks, saying only that it had given some note-holders the option of taking a slice of the underlying mortgages in lieu of repayment. It declined to comment further.

KFN converted from a real estate investment trust last year as it moved away from investing in mortgages to focus on corporate loans, selling $5.1bn of its home loan portfolio at a loss in August. It said then it had funded $5.3bn of its remaining mortgage investments through the commercial paper programmes, although it has paid it down steadily since then.

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