KKR Financial Holdings LLC, a specialty finance firm, on Monday said it planned to sell about $500 million in stock, but could take a $200 million charge from mortgage bond-related losses and be forced to change its tax status.
KKR Financial, an affiliate of buyout firm Kohlberg Kravis Roberts & Co, recently sold $5.1 billion of residential mortgage assets and interest rates swaps, which will result in a $40 million loss. It now owns about $5.8 billion in mortgage loans, which it finances with note facilities of about $200 million.
The company said it was trying resolve potential funding disruptions caused by unprecedented disruptions in the residential mortgage and global commercial paper markets. If the efforts failed, it said it could take a charge of up to $200 million.
In addition, since it has sold a significant portion of the mortgage-related assets, its affiliate KKR Financial might fail to qualify as a real estate investment trust, or REIT, for the 2007 tax year.
If it fails to qualify as a REIT, it will have to pay federal, state and local income tax on its income for the year, which it estimated to be up to $50 million.
KKR Financial converted from a REIT to a limited liability company in May 2007, but invested in residential real estate assets to be treated as a REIT for federal income tax purposes.
Shares in KKR Financial rose in early trading on the New York Stock Exchange, continuing a rebound from last week after falling most of the past two months on concerns about its mortgage-bond related investments.
Shares were up 10 percent, or $1.42, to $15.82 in mid-morning trade on the New York Stock Exchange.
It plans to raise about $230.4 million by selling 16 million common shares at $14.40 each.
It negotiated to sell the stock to financial groups including Morgan Stanley, Farallon Capital Management LLC, Fir Tree Partners, JGE Capital Management, Marsico Capital Management, Oak Hill Advisors and Sageview Capital LP.
KKR Financial also said it would raise up to $270 million in a rights offering of up to 18.7 million shares at $14.40 each. Proceeds from both offerings are for general corporate purposes.
(With reporting by John Tilak in Bangalore)