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KKR Financial Holdings LLC Q2 2010 Earnings Call Transcript

KKR Financial Holdings LLC Q2 2010 Earnings Call Transcript

KKR Financial Holdings LLC (KFN)

Q2 2010 Earnings Call

August 4, 2010 5:00 PM ET

Executives

TST Recommends

Laurie Poggi – Investor Relations

Bill Sonneborn – Chief Executive Officer

Michael McFerran – Chief Operating Officer

Jeffrey Van Horn – Chief Financial Officer

Analysts

Michael Sarcone – Sandler O'Neill

Gabe Poggi – FBR

John Hecht – JMP Securities

Leon Cooperman – Omega Advisors Incorporated

Edward Ripley – CP Harlot Investments

Robert Schwartzberg – Compass Point

Sandro Naf – Capital Four

Lee Cooperman – Omega Advisors Inc

Presentation

Operator

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Previous Statements by KFN
» KKR Financial Holdings LLC Q1 2010 Earnings Call Transcript
» KKR Financial Holdings LLC Q4 2009 Earnings Call Transcript
» KKR Financial Holdings LLC Q3 2009 Earnings Call Transcript

Please standby, we are about to begin. Ladies and gentlemen, thank you for standing by. Welcome to the KKR Financial Holdings Second Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following today’s management's prepared remarks, the conference will begin with -- today's call is being recorded.

I would now like to turn the conference over to Laurie Poggi. Laurie, please go ahead.

Laurie Poggi

Thank you, Melanie, and good afternoon, everyone. Welcome to our second quarter 2010 conference call. During which Bill Sonneborn, our Chief Executive Officer; and Michael McFerran, our Chief Operating Officer will review the results for the quarter and answer your questions.

Today, we issued our financial results release for the quarter ended June 30th, and filed our second quarter Form 10-Q with the Securities and Exchange Commission. These documents together with a supplemental information packet are available in the Investor Relations section of our website at www.kkr.com.

As required, we like to remind you that this conference call contains forward-looking statements that are based on the beliefs of the management team regarding the operations and the results of the operations of the company, as well as general economic conditions. These beliefs, and the related forward-looking statements, are subject to substantial risks and uncertainties, which are described in greater detail in the filings that we have made with the Securities and Exchange Commission. These filings are available on the SEC website at www.sec.gov. Our actual results may vary materially from those described in these forward-looking statements.

Today’s call is being webcast live on our website. The audio webcast will be archived and a telephonic replay will be available beginning later today through August 18th.

And with that, I'll turn the call over to Bill.

Bill Sonneborn

Thank you, Laurie. And thank you, everyone, who has joined us for the call today. We appreciate your time and your interest in KFN.

I’ll start today’s call by reviewing the highlights of the quarter. In the choppy and negative quarter in the financial market we were able to generate earnings per share of $0.51 for the quarter. Additionally, our Board of Directors today declared a cash distribution of $0.12 per share for the quarter. This represents a 20% increase in our distribution over the first quarter and our third consecutive quarter-over-quarter increase in distributions per share.

Our earnings per share of $0.51 for the second quarter compares to $0.82 for the first quarter of this year and $0.14 for the second quarter of 2009. You may recall that in the first quarter we recorded a $39 million gain or $0.25 per share on the extinguishment of debt in connection with our purchase of mezzanine and subordinated notes issued by CLO 2007-1 and 2007-A.

Operating income, a non-GAAP financial measure we use calculated as net investment income excluding discount accretion income from early prepayments plus non-investment expenses and excluding the impact of share based compensation and incentive fees was $0.36 for the quarter as compared to $0.39 for the first quarter of 2010 and $0.22 for the second quarter of 2009.

Pro forma for previously capitalized debt issuance costs they were written-off during the quarter as a result of our new revolver being put into place. Operating income per share equaled $0.40 for the quarter versus $0.39 in the previous or the first quarter.

In addition, the 2009 comparative amount of $0.22 per share included a $12.8 million charge for provision for loan losses which reduced operating income for that period by $0.08 per share. Accordingly, when adjusted for these one items our operating income as our performance 33% year-over-year, driven by higher net interest margin and earnings on retain capital.

Book value per share for the quarter ended June 30th was $8.08 per share, a decline from $8.31 at the end of the first quarter. This decline was due primarily to market value declines in high yield bonds, which are all reflected in accumulated other comprehensive income or OCI on the balance sheet. As well as the effects of the treasury market rally during the quarter and the interest swaps primarily contain within our CLOs in which we hedge our bond positions back to floating rate.

We continue to focus on the same three areas we’ve discussed last quarter. One, growing cash flow per share, two, book value per share growth, and three, growing distributions per share.

While periods of volatility and high yield pricing can create quarter-over-quarter swings in book value, we remain cautiously optimistic that we will be able to achieve all three objectives this year. For example much of the impact of the declining high yield prices in the second quarter on our book value per share as reversed itself already through the month of July.

During the quarter we replaced our existing 150 million credit facility due to mature in November 2011 with a new 250 million revolving credit facility that matures in May 2014. This new credit facility provides us with increase flexibility to pursue opportunities and managed cash flows. In addition, that reduces our overall costs of capital. We executed this facility in conjunction with the planned equity offering, which is a topic, I do want to spend a few minutes discussing with all of you.

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