This morning's Wall Street Journal [subscription] suggests that an affiliate of private equity titan Kohlberg Kravis & Roberts is short on cash. In particular, KKR Financial Holdings LLC (NYSE: KFN) wants to delay repayment of $5 billion in short-term debt held by 15 investors, including some money-market funds.
If you are not one of these investors, why should you care? Here are two reasons:
-
KKR -- which owns 12% of KKR Financial -- is one of the most respected names in finance, so if it's having problems coming up with the cash to pay short-term loans, it would not surprise me if others were having problems as well. As I noted recently, the problem the market faces is one of disclosure.
-
KKR's problems coming up with money are a result of its holdings in "jumbo" mortgages of more than $417,000. So contrary to the claims of Fed Chair Ben Bernanke and Treasury Secretary Hank Paulson, KKR's problems suggest that the unfolding credit market problems are not contained to subprime -- rather they now extend to jumbo mortgages and commercial paper.
KKR Financial CEO Saturnino Fanlo described the market turmoil as "the most disturbing liquidity crisis, with real impact throughout the economy if it does not rectify." But he said the remaining expected loss would amount to just 10% of its $2 billion in capital. And one credit rater, Fitch Ratings, downgraded the commercial paper late yesterday from its highest rating to "junk" status, saying the KKR issuers had breached some of their collateral tests.
Do KKR's problems suggest deeper issues with commercial paper? This could be like a blood clot in the arteries of our financial system. Since it does not appear to me that the government knows what is going on, it makes me question the value of the current government-lite approach to financial market regulation.
If the companies that caused the problems end up paying for all the losses themselves, I will be fine with the current approach. But if society ends up paying the costs, I would suggest a different approach -- full, accurate, real-time, understandable disclosure of each firm's financial condition.
Meanwhile, KKR Financial's credit crisis suggests that the odds of its parent's IPO have tumbled even further than they were last month.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
Reid Hoffman: LinkedIn will go public (at some point)
Retailers can't wait for Black Friday, open Thursday
Tiffany's serves up solid quarterly earnings
Reader Comments (Page 1 of 1)
8-16-2007 @ 3:29PM
Flabongid said...
KKR.....
It's about time that chicken came home to roost.