KKR Affiliate Seeks Repayment Delay
By RANDALL SMITH and HENNY SENDER
August 16, 2007
The meltdown in mortgage markets hit Wall Street titan Kohlberg Kravis Roberts & Co. yesterday, as a KKR real-estate affiliate sought to delay repayment of $5 billion in short-term debt held by 15 money-market funds.
The action at KKR Financial Holdings LLC is the biggest blowup to hit the market for commercial paper, a form of short-term debt used by companies to fund operations. Although it is designed as a haven for cash, some issuers of asset-backed commercial paper have been hit by declining values of collateral linked to subprime mortgages.
The repayment delay and related losses of up to $290 million amount to a black eye for KKR founders Henry Kravis and George Roberts at a time when they are weighing a public offering and trying to complete several buyouts whose financing plans have been disrupted by the debt-market turmoil.
KKR is also the latest big Wall Street name, after Bear Stearns Cos. and Goldman Sachs Group Inc., to face a situation in which an affiliate confronted losses and possible demands for debt payment or redemptions. Bear put up funds to repay creditors of a mortgage hedge fund, and Goldman pumped its own money into a money-losing hedge fund. But it wasn't clear whether KKR would consider such a step.
The news came as markets gyrated for a second day amid jitters over how far problems with the mortgage market might spread. An analyst downgrade of mortgage lender Countrywide Financial Corp. sent its shares lower and contributed to the hand-wringing over the credit markets. The Dow Jones Industrial Average fell below the 13000 mark for the first time in nearly four months, losing 167.45, or 1.3%, to 12861.47 after being up as much as 90 points during the day.
KKR Financial has been hit by a pullback by banks and other lenders from investing in "jumbo" mortgages of more than $417,000, according to people familiar with the situation. While such loans aren't in the subprime category, which comprises risky loans to less-creditworthy borrowers and is at the heart of the current turmoil, they aren't eligible for the same backing as smaller loans by federally sponsored housing finance agencies.
KKR Financial, in which KKR owns a 12% stake, said yesterday it recently sold $5.1 billion of mortgage loans at a loss of $40 million, and may lose as much as $200 million more on its investment in two issuers of commercial paper. It also said it could face an additional $50 million in related but unspecified "liabilities."
The KKR commercial-paper issuers, KKR Atlantic Funding Trust and KKR Pacific Funding Trust, asked to delay the repayment and extend the notes' maturity for up to six months, citing "the unprecedented disruption in the residential mortgage and global commercial-paper markets."
The two issuers raised money with $500 million in equity backing from KKR Financial and invested in mortgage securities based on a debt-to-equity ratio of about 20 to 1, said the people familiar with the situation. Such mortgages might fetch only 90% or less of their face value now, these people said.
KKR Financial sold some of the mortgages beginning in May, based on a decision to convert to a limited liability corporation from a real-estate investment trust, which offered favorable tax treatment but required that 75% of its assets be in real estate.
The KKR payment extension is the latest bomb to rock the market for short-term commercial paper, where three other issuers extended repayments last week. While offering a cheap source of financing, the market can be vulnerable to shocks. Two weeks ago, Bear Stearns disclosed that it reduced its reliance on such debt as part of its effort to weather what it described as a "market storm."
The repayment delay doesn't appear to pose an immediate threat to the money-market funds that hold the paper, said Peter Crane, a money-fund expert in Westborough, Mass. Mr. Crane said such funds must limit any single holding to 5% of assets, and many have other backstops to cover losses. "They all learned the lessons" of blowups in the 1990s.
KKR Financial's strategy for KKR Atlantic and KKR Pacific was to issue triple-A commercial paper at low short-term rates and invest in triple-A mortgage securities, which paid slightly higher rates. However, the strategy depended on the ability to resell the mortgages on short notice, while demand has dried up unexpectedly.
The turmoil in the asset-backed sector of the $2.2 trillion U.S. commercial-paper market "has exposed a serious Achilles' heel in the global credit markets," said a report from CreditSights Inc., a bond research firm. The upheaval "now looms as the most pressing issue facing financial markets," research analysts at Banc of America Securities LLC warned this week.
KKR Financial went public in June 2005. Yesterday's news knocked the stock down $4.75, or 31%, to $10.52 on the New York Stock Exchange. First sold at $24 a share, the stock has since tumbled a total of 56%. |
发表于 2007-8-16 08:35:16
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