8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 28, 2008

KKR Financial Holdings LLC

(Exact name of registrant as specified in its charter)

Delaware	001-33437	11-3801844
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)
555 California Street, 50th Floor
San Francisco, California		94104
(Address of principal executive offices)		(Zip Code)

415-315-3620

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

oSoliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

oPre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

oPre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

ITEM 2.02  Results of Operations and Financial Condition.

On January 28, 2008, KKR Financial Holdings LLC (the “Company”) issued an earnings release announcing its financial results for the fourth quarter and year ended December 31, 2007. A copy of the earnings release is attached as Exhibit 99.1.

Non-GAAP Financial Information

In the attached earnings release, in addition to the consolidated balance sheet and statements of operations presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”), the Company discloses certain information on an economic basis (“Economic”). The Company’s Economic basis of presenting financial information differs from GAAP presentation due to the following four items:

Joint Structured Finance Transactions

The Company consolidates five collateralized loan obligation (“CLO”) entities (collectively, the “Joint CLOs”) as it is the primary beneficiary of these entities as defined by FASB Interpretation No. 46R, Consolidation of Variable Interest Entities. Because these entities are securitization vehicles with no economic equity interests, subordinated noteholders receive the net income from these entities. The Company holds the majority of the subordinated notes while the KKR Strategic Capital Funds, affiliates of the Company’s manager, hold the remaining minority percentage of the subordinated notes. In accordance with GAAP, the Company consolidates the Joint CLOs on its consolidated financial statements with the minority interest in the Joint CLOs reflected as debt on the Company’s consolidated balance sheet. The net income or loss of the Joint CLOs is reflected on the Company’s consolidated statements of operations presented in accordance with GAAP through the consolidated income and expense accounts of the Joint CLOs. The net income or loss allocable to the minority interest holders of the subordinated notes is included as interest expense on the Company’s consolidated statements of operations presented in accordance with GAAP. Adjustments to the Company’s consolidated statements of operations presented under GAAP to arrive at the Economic consolidated statements of operations due to the Joint CLOs do not change net income (loss), rather it reflects the Company’s proportionate share of income and expenses from the Joint CLOs based on the Company’s percentage of the subordinated notes in the Joint CLOs. Similarly, the Company’s consolidated balance sheet presented in accordance with GAAP reflects the assets and liabilities of the Joint CLOs and the unrealized gains (losses) on investments classified as available-for-sale are included in accumulated other comprehensive income (loss), a component of shareholders’ equity. The Economic consolidated balance sheet reflects the Company’s proportionate share of the assets and liabilities of the Joint CLOs and the Company’s proportionate share of the unrealized gains (losses) from securities classified as available-for-sale in accumulated other comprehensive income (loss).

Presentation of Joint CLOs on an Economic basis is consistent with management’s internal reporting used to evaluate its portfolio, liquidity and leverage, and to measure its results against forecasted yield and other benchmark portfolio measures.

Total Rate of Return Swaps

The Company uses total rate of return swaps (“TROR”) to finance investments in corporate loans. Because the Company’s TROR transactions meet the definition of a derivative under Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, the Company presents TROR transactions as derivative assets or liabilities on its consolidated balance sheet in accordance with GAAP and presents the income or losses from TROR transactions in net unrealized and realized gains (losses) from derivatives and foreign exchange on the Company’s consolidated statements of operations. On the Economic consolidated balance sheet, TROR transactions are presented on a gross basis with the fair value of the asset being financed included in loans in the asset section and the cost of the asset that is being financed under the TROR transaction included in debt in the liabilities section. There is no change in net assets or equity from the change in presentation of TROR transactions from a GAAP basis of presentation to an Economic basis of presentation. On the Economic consolidated statements of operations, the interest income and interest expense components of the unrealized gains or losses from TROR transactions are classified as interest income and interest expense, respectively. There is no effect on net income from the change in presentation of TROR transactions from a GAAP basis of presentation to an Economic basis of presentation.

2

Presentation of TROR transactions on an Economic basis is consistent with management’s internal reporting used to evaluate its investment portfolio and its net investment income from its investing and financing activities.

Share-Based Compensation

Included in the Company’s non-investment expenses on its consolidated statements of operations is share-based compensation expense, or benefit, that is recognized by the Company in accordance with SFAS No. 123R, Share-Based Payment, for common share options and restricted common shares granted by the Company to its manager and to members of its Board of Directors. The Company’s Economic consolidated statements of operations excludes share-based compensation expense or benefit.

Presentation of the Company’s results of operations excluding share-based compensation expense or benefit is consistent with how the Company evaluates its periodic results for purposes of determining shareholder distributions as share-based compensation expense or benefit is a non-cash expense for the Company.

Discontinued Operations

The Company’s Economic balance sheet presents the net asset balance of discontinued operations.  Presentation of the Company’s discontinued operations on a net asset basis is consistent with how the Company evaluates its discontinued operations.

The Company presents the following non-GAAP financial measures in the attached earnings release that incorporate the adjustments described above:

·Economic net income (loss): This is the Company’s net income (loss) adjusted to exclude share-based compensation expense or benefit.

·Economic balance sheet: This is the Company’s consolidated balance sheet presented in accordance with GAAP and is adjusted to reflect the aforementioned adjustments for Joint CLOs, TROR transactions, and share-based compensation expense or benefit.

·Economic statements of operations: This is the Company’s statements of operations for the periods presented in accordance with GAAP and is adjusted to reflect the aforementioned adjustments for Joint CLOs, TROR transactions, and share-based compensation expense or benefit.

The Company believes that these non-GAAP financial measures provide useful information to investors by providing an understanding of the Company’s financial condition and operational performance through which liquidity and periodic results, for purposes of evaluating the income available for distributions to shareholders, can be assessed.

The non-GAAP financial measures are provided as supplemental information and should not be relied upon as an alternative to GAAP. Reconciliations of these non-GAAP financial measures to GAAP measures are provided in the attached.

The information in this Current Report, including the exhibit hereto, is being furnished and shall not be deemed “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The information in this Current Report shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended.

ITEM 9.01  Financial Statements and Exhibits.

Exhibit 99.1  Earnings release regarding the financial results for the fourth quarter and year ended December 31, 2007.

3

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

		KKR Financial Holdings LLC
		(Registrant)
Date: January 28, 2008		/s/ JEFFREY B. VAN HORN
	By:	Jeffrey B. Van Horn
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

4

EXHIBIT INDEX

Exhibit Number	Description
99.1	Earnings release regarding the financial results for the fourth quarter and year ended December 31, 2007.

5

EX-99.1

Exhibit 99.1

Investor Contact
Laurie Poggi
KKR Financial LLC
415-315-3718 Media Contact
Roanne Kulakoff and Joseph Kuo
Kekst and Company
212-521-4837 and 212-521-4863

KKR Financial Holdings LLC Announces Fourth Quarter and Full Year 2007 Financial Results

SAN FRANCISCO, CA, January 28, 2008—KKR Financial Holdings LLC (NYSE: KFN) (“KFN” or the “Company”) today announced its results for the fourth quarter and year ended December 31, 2007.

Highlights of KKR Financial Holdings LLC’s results include:

·For the fourth quarter ended December 31, 2007, economic income from continuing operations, a non-GAAP financial measurement, totaled $63.0 million, or $0.55 per diluted common share, and economic net income, a non-GAAP financial measurement, totaled $59.5 million, or $0.52 per diluted common share. For the fourth quarter ended December 31, 2007, GAAP income from continuing operations totaled $63.4 million, or $0.55 per diluted common share, and GAAP net income totaled $59.9 million, or $0.52 per diluted common share. A reconciliation of economic to GAAP results is provided on Schedule I.

·As of year-end, available cash and cash equivalents totaled $1,039.7 million, consisting of $524.1 million of unrestricted cash, $430.1 million of restricted cash that can be used to purchase corporate investments, and $85.5 million of restricted cash that can be used for debt service payments.

·Closed a $1.5 billion structured finance transaction and issued $1.2 billion of senior secured non-recourse debt.  The proceeds will be used to fund corporate debt investments.

·Closed a $2.0 billion structured finance transaction which provides for the issuance of up to $1.6 billion of senior secured non-recourse debt. The proceeds will be used to fund corporate debt investments.

·Closed a €800.0 million warehouse facility. The proceeds will be used to fund non-U.S. dollar corporate debt investments.

·As of year-end, continuing operations net economic leverage was 3.4x.

*     *     *

For the quarter ended December 31, 2007, KFN reported economic income from continuing operations, a non-GAAP financial measurement, of $63.0 million, or $0.55 per diluted common share, and economic net income, a non-GAAP financial measurement, of $59.5 million, or $0.52 per diluted common share. For the year ended December 31, 2007, KFN reported economic income from continuing operations, a non-GAAP financial measurement, of $214.3 million, or $2.37 per diluted common share, and economic net loss, a non-GAAP financial measurement, of $98.3 million, or $1.08 per diluted common share. Economic income from continuing operations, a non-GAAP financial measurement, for the fourth quarter and year ended December 31, 2006 totaled $32.6 million, or $0.40 per diluted common share and $111.9 million, or $1.39 per diluted common share, respectively. Economic net income, a non-GAAP financial measurement, for the fourth quarter and year ended December 31, 2006 totaled $44.5 million, or $0.54 per diluted common share and $164.5 million, or $2.05 per diluted common share, respectively.

For the quarter ended December 31, 2007, GAAP income from continuing operations totaled $63.4 million, or $0.55 per diluted common share and GAAP net income totaled $59.9 million, or $0.52 per diluted common share. For the year ended December 31, 2007, GAAP income from continuing operations totaled $212.4 million, or $2.34 per diluted common share and GAAP net loss totaled $100.2 million, or $1.11 per diluted common share. GAAP income from continuing operations for the fourth quarter and year ended December 31, 2006 totaled $25.5 million, or $0.32 per diluted common share and $82.8 million, or $1.03 per diluted common share, respectively. GAAP net income for the fourth quarter and year ended December 31, 2006 totaled $37.4 million, or $0.46 per diluted common share and $135.3 million, or $1.68 per diluted common share, respectively.

A reconciliation of economic to GAAP results is provided on Schedule I.

Liquidity

As of December 31, 2007, available cash and cash equivalents totaled $1,039.7 million, consisting of $524.1 million of unrestricted cash and cash equivalents, $430.1 million of restricted cash that can be used to purchase corporate investments, and $85.5 million of restricted cash that can be used for debt service payments.

Leverage

As of year-end, continuing operations net economic leverage was 3.4x.  Continuing operations net economic leverage is computed as total continuing operations economic borrowings of $7.8 billion less the sum of 30-year trust preferred securities totaling $329.9 million, which are classified as junior subordinated notes on the Company’s consolidated balance sheet, and unrestricted cash of $524.1 million, divided by the sum of economic shareholders’ equity of $1.7 billion plus 30-year trust preferred securities totaling $329.9 million.

Book Value Per Common Share

The Company’s GAAP book value per common share outstanding was $14.27 and $15.01 as of December 31, 2007 and September 30, 2007, respectively. The Company’s economic book value per common share outstanding was $14.62 and $15.19 as of December 31, 2007 and September 30, 2007, respectively.

Financing Transactions

On October 31, 2007, the Company closed a $1.5 billion structured finance transaction that provides $1.2 billion of ten-year non-recourse financing for investments in corporate loans and securities.

Also on October 31, 2007, the Company closed a €800.0 million warehouse facility that is structured as a repurchase facility to provide financing for investments in non-U.S. dollar corporate loans and securities.

On November 5, 2007, the Company closed a $2.0 billion structured finance transaction that provides up to $1.6 billion of five-year non-recourse financing for investments in corporate loans and securities.

Information for Investors: Conference Call and Webcast

The Company will host a conference call and audio webcast to review its fourth quarter and annual 2007 results on Monday, January 28, 2008, at 5:00 p.m. EST. The conference call can be accessed by dialing 888-211-0226 (Domestic) or 913-312-0388 (International); a pass code is not required. A replay will be available through Monday, February 11, 2008 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 4944519. Supplemental materials that will be discussed during the call, as well as a live webcast of the call, will be accessible on the Company’s website, at

www.kkrkfn.com, via a link from the Investor Relations section. A replay of the audio webcast will be archived in the Investor Relations section of the Company’s website.

Note Regarding Use of Non-GAAP Financial Measures

The non-GAAP items referred to in this earnings release are provided as supplemental information, and should not be relied upon as alternative measures to GAAP. These non-GAAP financial measures consist of items calculated by the Company on an “economic” basis, which includes the following: (i) presentation of the Company’s proportionate share of certain structured finance vehicles where the Company holds a majority ownership interest and consolidates such vehicles in accordance with GAAP; (ii) presentation of assets financed through total rate of return swaps on a non-derivative basis; (iii) exclusion of share-based compensation in the calculation of economic net income or loss; and (iv) presentation of the net assets of the Company’s discontinued operations. The Company believes that the non-GAAP measures presented in this earnings release provide useful information to investors by providing an understanding of the Company’s financial condition and operational performance through which liquidity and periodic results, for purposes of evaluating the income available for distributions to shareholders, can be assessed.

About KKR Financial Holdings LLC

KKR Financial Holdings LLC is a specialty finance company that invests in multiple asset classes. KKR Financial Holdings LLC is externally managed by KKR Financial Advisors LLC. KKR Financial Holdings LLC and KKR Financial Advisors LLC are affiliates of Kohlberg Kravis Roberts & Co. L.P.  Additional information on KKR Financial Holdings LLC is available at http://www.kkrkfn.com.

Statements in this press release which are not historical fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although KKR Financial Holdings LLC believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from the Company’s expectations include completion of pending investments, continued ability to originate new investments, the mix of originations and prepayment levels, the availability and cost of capital for future investments, competition within the specialty finance sector, economic conditions, credit loss experience, availability of financing, maintenance of sufficient liquidity, and other risks disclosed from time to time in the Company’s filings with the SEC.

Schedule I

KKR Financial Holdings LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	For the three months ended December 31, 2007												For the year ended December 31, 2007
(amounts in thousands, except per share information)	Economic Measure				Reconciliation Adjustments(1)				Reported				Economic Measure			Reconciliation Adjustments(1)			Reported
Net investment income:
Loan interest income		$	142,455			$	35,439			$	177,894		$	409,019		$	52,036		$	461,055
Securities interest income		28,796				8,623				37,419			97,168			20,385			117,553
Dividend income		1,103				—				1,103			3,825			—			3,825
Other interest income		15,663				1,941				17,604			34,342			3,363			37,705
Total investment income		188,017				46,003				234,020			544,354			75,784			620,138
Interest expense		(112,997		)		(20,884		)		(133,881		)	(333,460		)	(32,569		)	(366,029		)
Interest expense to affiliates		—				(31,535		)		(31,535		)	—			(60,939		)	(60,939		)
Provision for loan losses		—				—				—			(25,000		)	—			(25,000		)
Net investment income		75,020				(6,416		)		68,604			185,894			(17,724		)	168,170
Other income:
Net realized and unrealized gain on investments		6,285				1,956				8,241			94,060			4,140			98,200
Net realized and unrealized (loss) gain on derivatives and foreign exchange		(2,352		)		3,783				1,431			(13,587		)	12,596			(991		)
Other income		2,006				754				2,760			8,957			1,150			10,107
Total other income		5,939				6,493				12,432			89,430			17,886			107,316
Non-investment expenses:
Related party management compensation		13,750				(553		)		13,197			51,191			1,344			52,535
General, administrative and directors expenses		3,944				256				4,200			17,561			733			18,294
Professional services		1,211				—				1,211			4,706			—			4,706
Total non-investment expenses		18,905				(297		)		18,608			73,458			2,077			75,535
Income from continuing operations before equity in income of unconsolidated affiliate and income tax (benefit) expense		62,054				374				62,428			201,866			(1,915		)	199,951
Equity in income of unconsolidated affiliate		—				—				—			12,706			—			12,706
Income from continuing operations before income tax (benefit) expense		62,054				374				62,428			214,572			(1,915		)	212,657
Income tax (benefit) expense		(989		)		—				(989		)	256			—			256
Income from continuing operations		63,043				374				63,417			214,316			(1,915		)	212,401
Loss from discontinued operations		(3,510		)		—				(3,510		)	(312,606		)	—			(312,606		)
Net income (loss)		$	59,533			$	374			$	59,907		$	(98,290	)	$	(1,915	)	$	(100,205	)
Net income (loss) per common share:
Basic
Income per share from continuing operations		$	0.55							$	0.55		$	2.38					$	2.36
Loss per share from discontinued operations		$	(0.03	)						$	(0.03	)	$	(3.47	)				$	(3.47	)
Net income (loss) per share		$	0.52							$	0.52		$	(1.09	)				$	(1.11	)
Diluted
Income per share from continuing operations		$	0.55							$	0.55		$	2.37					$	2.34
Loss per share from discontinued operations		$	(0.03	)						$	(0.03	)	$	(3.45	)				$	(3.45	)
Net income (loss) per share		$	0.52							$	0.52		$	(1.08	)				$	(1.11	)
Weighted-average number of common shares outstanding:
Basic		114,466								114,466			89,953						89,953
Diluted		114,813								114,813			90,640						90,640
Distributions declared per common share		$	0.50							$	0.50		$	2.16					$	2.16

(1)These adjustments reconcile the Company’s GAAP (reported) statements of operations presentation to an economic, non-GAAP presentation. The nature of these adjustments is described under “Note Regarding Use of Non-GAAP Financial Measures” in this earnings release.

Schedule II
KKR Financial Holdings LLC
CONSOLIDATED BALANCE SHEET (UNAUDITED)

	December 31, 2007
(amounts in thousands, except share information)	Economic Measure			Reconciliation Adjustments(1)			Reported
Assets
Cash and cash equivalents	$	524,080		$	—		$	524,080
Restricted cash and cash equivalents	866,829			196,699			1,063,528
Securities available-for-sale	1,070,468			289,073			1,359,541
Loans, net of allowance for loan losses of $25,000	6,819,296			1,814,912			8,634,208
Derivative assets	15,870			2,867			18,737
Interest and principal receivable	130,867			16,730			147,597
Non-marketable equity securities	20,084			—			20,084
Reverse repurchase agreements	69,840			—			69,840
Other assets	73,128			6,176			79,304
Assets of discontinued operations	116,822			7,012,284			7,129,106
Total assets	$	9,707,284		$	9,338,741		$	19,046,025
Liabilities
Repurchase agreements	$	2,365,234		$	274,726		$	2,639,960
Collateralized loan obligation senior secured notes	4,623,344			1,325,266			5,948,610
Collateralized loan obligation junior secured notes to affiliates	—			525,420			525,420
Secured revolving credit facility	156,669			—			156,669
Secured demand loan	24,151			—			24,151
Convertible senior notes	300,000			—			300,000
Junior subordinated notes	329,908			—			329,908
Subordinated notes to affiliates	—			152,574			152,574
Accounts payable, accrued expenses and other liabilities	7,143			247			7,390
Accrued interest payable	87,750			15,807			103,557
Accrued interest payable to affiliates	—			44,121			44,121
Related party payable	9,694			—			9,694
Securities sold, not yet purchased	100,394			—			100,394
Derivative liabilities	17,815			28,939			46,754
Liabilities of discontinued operations	—			7,012,284			7,012,284
Total liabilities	8,022,102			9,379,384			17,401,486
Shareholders’ Equity
Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding	—			—			—
Common shares, no par value, 250,000,000 shares authorized and 115,248,990 shares issued and outstanding	—			—			—
Paid-in-capital	2,165,241			1,915			2,167,156
Accumulated other comprehensive loss	(116,602		)	(40,643		)	(157,245		)
Accumulated deficit	(363,457		)	(1,915		)	(365,372		)
Total shareholders’ equity	1,685,182			(40,643		)	1,644,539
Total liabilities and shareholders’ equity	$	9,707,284		$	9,338,741		$	19,046,025

(1)These adjustments reconcile the Company’s GAAP balance sheet presentation to an economic, non-GAAP presentation. The nature of these adjustments is described under “Note Regarding Use of Non-GAAP Financial Measures” in this earnings release.

Schedule III
KKR Financial Holdings LLC
ECONOMIC INVESTMENT PORTFOLIO AS OF DECEMBER 31, 2007 (UNAUDITED)

(amounts in thousands) (1)	Amortized Cost		Estimated Fair Value		Portfolio Mix % by Fair Value
Corporate loans (2)	$	6,844,296	$	6,595,633	85.8	%
Corporate debt securities	1,118,332		1,022,691		13.3
Marketable equity securities	58,529		47,777		0.6
Non-marketable equity securities	20,084		20,084		0.3
Total investment portfolio	$	8,041,241	$	7,686,185	100.0	%

(1)Estimated fair values set forth in the schedule are based on dealer quotes and/or nationally recognized pricing services and management estimates for investment positions for which dealer quotes and/or nationally recognized pricing data are not available. The table above excludes securities sold, not yet purchased with an amortized cost of $103.1 million and an estimated fair value of $100.4 million.

(2)Total loans excludes the allowance for loan losses of $25.0 million.