KKR Financial Delays Repayments, Starts Negotiations

(Bloomberg) -- KKR Financial Holdings LLC, Kohlberg Kravis Roberts & Co.'s only publicly traded fixed-income fund, delayed repaying debt a second time in six months after failing to find buyers for commercial paper backed by mortgages.

Lenders to the fund agreed to the delay as KKR Financial seeks to restructure, the San Francisco-based company said yesterday in a regulatory filing. KKR Financial, whose stock has fallen 50 percent in the past year, didn't say how much debt is affected.

The announcement rekindled concerns that the decline in the market for short-term asset-backed debt, which totaled $1.2 trillion in August, will accelerate after a rebound early last month. Assets fell to $796 billion in the week ended Feb. 13, the third weekly drop. Standard & Poor's downgraded ratings on notes issued by KKR Pacific Funding Trust last week, citing uncertain pricing on the AAA rated securities that support them.

``The picture is getting worse and worse,'' said Felix Freund, who helps manage the equivalent of $14.7 billion of fixed-income securities at Frankfurt-based Union Investment GmbH. KKR Financial's second repayment extension ``shows there is still a lot of levered investments in the credit market that we can't see.''

About half the debt will be due by March 3 instead of Feb. 15, with the rest owed on March 25, according to the filing.

The talks come less than six months after the fund received a $230 million cash infusion from investors following losses on residential mortgages in the wake of the U.S. subprime crisis. The fund, led by Chief Executive Officer Saturnino Fanlo, raised a further $270 million in a rights offering with some of New York-based KKR's own partners buying shares in it, which had $19 billion of assets at the end of December.

Repricing `Driver'

The deferral drove investors to seek the security of government debt, sending 10-year Japanese bonds to the biggest gain in two weeks while perceived corporate risk in Asia and Europe soared. Contracts on Europe's Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 26.5 basis points to 611.5 today, according to Deutsche Bank AG. A basis point is 0.01 percentage point.

``The driver behind the current repricing is KKR Financial Holdings delaying repayment of CP for the second time,'' analysts led by Mark Harmer, head of credit research at ING Groep NV, said in a note to clients today.

KKR Financial fell 30 cents, or 2.1 percent, to $14.23 at 11:44 a.m. in New York Stock Exchange composite trading. Zoe Watt, a spokeswoman for KKR in London, declined to comment.

IPO

Kohlberg Kravis Roberts, the New York-based investment firm run by Henry Kravis and George Roberts, raised $800 million in KKR Financial's initial public offering in June 2005, selling the shares for $24 apiece. The fund raised money by selling commercial paper to invest in mortgages. It sold almost half of its mortgage loans in August as prices on bonds linked to U.S. home loans started to drop, leaving it with about $5.3 billion of mortgages.

Both Kravis and Roberts sit on KKR Financial's six-member investment committee, alongside KKR Partner Scott Nuttall, KKR Financial's Fanlo and Chief Operating Officer David Netjes.

Kravis and Roberts started the firm with Jerome Kohlberg, their colleague from Bear Stearns Cos., in 1976. Kohlberg left in 1987 and started his own buyout group, Kohlberg & Co. LLC. The private-equity business owns more than 42 companies with more than $180 billion of annual revenue and about 800,000 workers around the world. The firm's investments range from Alliance Boots Ltd. in the U.K. to Texas power producer TXU Corp., now known as Energy Future Holdings Corp.

 

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U.S. Economy: Housing Slump Fails to Quell Inflation

(Bloomberg) -- The two-year housing slump pushing the U.S. economy toward a recession hasn't alleviated inflation pressures, reports today showed.

Consumer prices rose 0.4 percent from December, with costs excluding food and energy climbing 0.3 percent, the most since June 2006, the Labor Department said. Builders started work on 1.012 million homes at an annual rate in January, close to a 16- year low, the Commerce Department reported in Washington.

The figures mean Federal Reserve Chairman Ben S. Bernanke will need to consider raising interest rates as soon as the economy stabilizes. Bernanke, who last week said the Fed is prepared to keep lowering interest rates, warned that faster inflation would ``greatly complicate'' the central bank's job.

``What this means is that they don't have as much comfort to play with rates,'' Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said on Bloomberg Television, referring to Fed officials. ``Once the U.S. economy looks like it's started to stabilize, they're going to have to jump right back in to that, raising rates back up to neutral.''

Treasury securities slumped after the consumer price report, while recouping most of the losses later. Ten-year note yields increased to 3.93 percent at 9:54 a.m. in New York from 3.90 percent late yesterday. The Standard & Poor's 500 stock index lost 0.8 percent, to 1,337.97.

Lowest Since 1991

Building permits, an indication of future construction, fell 3 percent to a 1.048 million rate, the lowest level since November 1991, today's Commerce report showed.

Housing starts were projected to rise to a 1.01 million pace from an originally reported 1.006 million rate in December, according to the median forecast in a Bloomberg survey of 72 economists. Permits were forecast to drop to a 1.05 million rate, from 1.068 million in December.

``We don't think housing has hit bottom yet,'' said Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto. ``Until we get some stabilization in sales or even a mild improvement, it's likely that construction will continue to weaken.''

A jump in food and energy costs, rents and clothing prices led the consumer-price index higher last month. Economists had forecast a 0.3 percent increase, with the so-called core rate gaining 0.2 percent, Bloomberg surveys showed.

Today's price report ``certainly showed a broad-based intensification of inflation pressures,'' said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. While the Fed currently ``is looking at growth,'' inflation ``will come back on the radar screen'' when economic data improve, he said.

Food Costs

Food prices, which account for about one-seventh of the CPI, rose 0.7 percent, matching the biggest gain since May 2004, after a 0.1 percent increase in January. Energy prices last month increased 0.7 percent, after rising 1.7 percent the previous month.

``Even if energy prices remain flat, the continued rise in retail food prices will damp consumer spending growth,'' JPMorgan Chase & Co. economists wrote in a note to clients last week.

Fuel costs were up 4.5 percent. Apparel prices rose 0.4 percent after a 0.1 percent increase in December.

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices that consumers pay for services ranging from medical visits to airline fares and movie tickets.

 

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