An affiliate of powerful leveraged buyout firm Kohlberg Kravis Roberts & Co. said Wednesday it will lose about $40 million from selling $5.1 billion in residential mortgages and warned an additional $200 million hit could be coming.
KKR Financial Holdingsblamed the estimated $40 million loss on "unprecedented disruptions" in the residential mortgage market, which have reverberated from the United States to banks in Europe and Asia.
An analyst at Friedman Billings Ramsey downgraded the KKR unit's stock to "market perform" from "outperform" on the threat of a liquidity risk.
"Essentially, the method of financing the assets that (KKR) holds in portfolio has significantly changed for the worse," FBR analyst Merrill Ross said in a research note.
Meanwhile, KKR Financial said its $200 million equity investment in its remaining $5.8 billion portfolio of residential mortgage-related assets could be erased. There also could be additional liabilities of up to $50 million.
Fleeing From Risk
Investors dumped at least $10 billion of assets Tuesday into the $6.6 trillion U.S. mortgage bond market in moves to reduce risk or to raise money to meet margin calls, traders and analysts said. Among the sellers, one real estate investment trust was said to have offered about $3 billion in non-agency adjustable-rate mortgage assets.
KKR said it is talking to other investors in its portfolio on how to resolve potential funding disruptions amid a rising wave of delinquencies and defaults on mortgages.
"No assurance can be made that any of the strategies being evaluated by the company will be successfully executed," KKR Financial said in a press release.
In May, KKR converted from a real estate investment trust to a limited liability company. Before that happened, KKR invested in real estate assets with high credit scores.
KKR previously has said it planned to dispose of its remaining portfolio. Alternatives include doing that through the sale of the common stock of its REIT subsidiary.
Shares of KKR Financial Holdings fell $4.59 to $10.68 in early trading on the New York Stock Exchange.