NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR) and unsecured debt rating of KKR Financial Holdings LLC (KFN) to 'A-' from 'BBB' following the closing of its acquisition by KKR & Co. L.P. (KKR). The preferred stock rating has also been upgraded, to 'BBB' from 'BB+'. All ratings have been removed from Rating Watch Positive and the Rating Outlook is Stable.
KKR's long-term IDR and unsecured debt ratings were affirmed at 'A' on Dec. 17, 2013, following the announced acquisition. The closing of the acquisition has no rating impact on KKR's ratings.
A complete list of rating actions is detailed at the end of this release.
KEY RATING DRIVERS - IDR and Unsecured Debt
The upgrade of KFN's ratings reflects Fitch's view that the entity is strategically important to KKR, as outlined in Fitch's criteria, 'Rating FI Subsidiaries and Holding Companies'. In accordance with the criteria, a subsidiary considered to be of strategic importance is rated one to two notches below its parent. As a result of KFN's upgrade, its IDR of 'A-' is now one notch below the 'A' IDR of KKR.
KKR's non-private equity business, which is included in its public markets segment, totaled $35.4 billion of fee-earning assets under management (FAUM) as of March 31, 2014. This business has been growing in recent years as the firm has focused on broadening its product suite for limited partners, improving the liquidity of its investment portfolio, and generating a recurring yield from the balance sheet. The KFN acquisition serves to accelerate that strategy, to some extent, as KFN has historically invested in more liquid credit via the issuance and management of CLOs, which provide a contractual yield to the firm.
Also supporting the view of KFN's strategic importance to KKR is the sharing of the brand, the high level of management integration, and the fact that during the recent financial crisis KKR provided explicit financial support to KFN, by waiving management fees, backstopping an equity raise, and providing the firm with a $100 million liquidity facility. While Fitch has continued to believe that KKR would provide additional support to KFN if necessary, this acquisition strengthens that notion.
That said; Fitch believes that KFN's small size and more limited track record prevent the firm from being considered a core subsidiary at present which would result in equalization of the ratings. Depending on KFN's size, strategy, and relative earnings contribution to KKR, Fitch's assessment of KFN's strategic importance could evolve over time.
KEY RATING DRIVERS - Preferred Stock
The upgrade of KFN's preferred stock rating to 'BBB' from 'BB+' reflects the rating upgrade of KFN's long-term IDR and maintains the existing two-notch differential between the long-term IDR and preferred stock rating, consistent with Fitch's "Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis" criteria published on Dec. 23, 2013.
RATING SENSITVITIES
The Stable Rating Outlook for KFN is aligned with the Stable Rating Outlook on KKR. The ratings of KFN are directly linked to KKR, as Fitch considers KFN to be a strategically important subsidiary. Any change in Fitch's view on the relationship between KFN and its parent could alter the rating linkage. Absent a change in the perceived relationship between KKR and KFN, Fitch would expect KFNs ratings to move in step with any changes to KKR's ratings. Additionally, a material increase in leverage and/or significant deterioration in the operating performance of KFN could become a constraining factor for the ratings of KKR.
On Dec. 17, 2013, KKR announced its intention to acquire KFN for approximately $2.6 billion in equity. The transaction was approved by shareholders and closed on April 30, 2014.
Fitch has upgraded the following:
KKR Financial Holdings LLC
-- Long-term IDR to 'A-' from 'BBB';
-- Unsecured debt to 'A-' from 'BBB';
-- Preferred stock to 'BBB' from 'BB+'.
All ratings have been removed from Rating Watch Positive and the Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com.'
Applicable Criteria and Related Research:
-- 'Global Financial Institutions Rating Criteria' (January 2014);
-- 'Investment Manager and Alternative Funds Criteria' (December 2013);
-- 'Rating FI Subsidiaries and Holding Companies' (August 2012).
Applicable Criteria and Related Research:
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Investment Manager and Alternative Funds Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725057
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863
Additional Disclosure
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