ASSET MANAGEMENT

KKR Financial Holdings LLC - Strategy

KFN reviews current and potential holdings of its majority-owned subsidiaries focusing on five major factors: credit standards, management quality, valuation, relative asset class valuation, and its views on macroeconomic conditions. Building on these factors, KFN is guided by the following key principles:

Credit Philosophy: This is part of its ongoing analysis of each opportunity — it includes anticipating credit performance by analyzing the competitive environment and industry dynamics.

Fundamental vs. Momentum: KFN is driven by company and economic fundamentals, rather than "momentum" driven investments.

Multi-Asset Class Strategy: KFN's multi-asset class strategy allows it to rotate sectors as industry and economic factors dictate to generate the highest risk-adjusted returns possible under its operating and tax model.

Targets: Consistent with the above principles, KFN's majority-owned subsidiaries target companies that meet the following requirements:

  • Operate with a differentiated business model and competitive advantage
  • Proven, ethical management team
  • Demonstrated ability to generate free cash flow, competitive returns, and sustainable margins
  • Ability to withstand various economic environments
  • Favorable long-term industry trends
  • Sufficient liquidity

Credit Review Process
KFN has a deliberate, collaborative, and highly disciplined credit review process. It is recurring and ongoing. It involves both debt (KKR Asset Management) and private equity professionals and industry teams working together to generate competitive returns.

Risk Management
Prior to taking a position, KFN prepares a comprehensive written investment committee memorandum that includes a complete financial model with stress cases, industry review, relative value, management profile, investment strengths, weaknesses, and covenant review. Each position requires unanimous approval by the investment committee and quarterly written reviews for presentation to the investment committee.

Daily third-party marks are received for over 95 percent of the bank loan and high yield positions held by majority-owned subsidiaries.

Financing
KFN applies moderate leverage using attractive, flexible, low-cost, financing tools to enhance the returns to its shareholders. KFN has a bias toward long-term, non-recourse financing.

KFN leverages its capital through its majority-owned subsidiaries that afford KFN control and flexibility such as collateralized loan obligations (CLOs). The amount of leverage will vary depending on KFN’s ability to obtain credit facilities and the lenders' and rating agencies’ estimate of the stability of the CLOs' cash flow. KFN manages total leverage to ensure that capital is always available to take advantage of opportunities and to meet liquidity needs.

Senior collateral loan obligation notes and a secured revolving credit facility are in place and used for existing portfolio leverage. KFN also uses unsecured debt including convertible notes and trust preferred securities.