KKR Financial Corp., the real investment trust subsidiary of Kohlberg Kravis Roberts & Co. with over $7 billion in assets under management, is finding very little value in the high-yield bond market and in secondary loans. "We see the high-yield segment as most expensive," Nino Fanlo, ceo, said in recorded call for investors. "We have made very few investments in the high yield segment of the corporate asset class to date." KKR does see value in the bank loan segment of the corporate asset class, but only in the primary market. "The bank loan segment of the corporate asset class is expensive in investments that are purchased in the secondary market given the lack of call protection on the assets. But if they are purchased on the primary market they are fairly attractive to valuable," commented Fanlo.
KKR continues to retain its defensive market position by focusing on senior secured investments. The majority of KKR's investments in the corporate asset class are in first lien senior secured bank loans. "As of June 30, 95% of our corporate asset class investments were in senior secured first lien loans," added Fanlo. KKR did not comment on what specific credits it is currently buying and selling.
KKR's strategy revolves around finding investments that will substantially lower its risk potential. KKR is focusing on not being negatively affected by an overall higher interest rate environment or by a flatter yield curve environment, according to Fanlo. "We seek to achieve this by investing in floating rate and hybrid rate investments," Fanlo said. The floating rate makes up 58.9% of the portfolio and contains an allocation of 9.2% residential ARM loans, 28.4% residential ARM securities, 17.7% corporate loans,1.6% corporate debt securities, 1.7% commercial real estate loans and 0.3% commercial real estate debt securities.
As of Dec. 31, 2004, KKR had no investments in hybrid rates as floating rates made up over 99% of their portfolio. Now hybrids make up 39.2% of KKR's portfolio, all in residential hybrid security ARMs. Securities and fixed-rate loans total only 2% of KKR's portfolio, with an allocation of 1.5% corporate debt securities and 0.5% in commercial real estate loans.
