10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to         

Commission file number: 001-33437

KKR FINANCIAL HOLDINGS LLC

(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number, including area code: (415) 315-3620

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes  x No

The number of shares of the registrant’s common shares outstanding as of May 2, 2012 was 178,393,521.

TABLE OF CONTENTS

		Page
Part I.
FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	66
Item 4.	Controls and Procedures	67
Part II.
OTHER INFORMATION
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults Upon Senior Securities	68
Item 4.	Mine Safety Disclosure	68
Item 5.	Other Information	68
Item 6.	Exhibits	68

2

PART I.    FINANCIAL INFORMATION

Item 1. Financial Statements

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands, except share information)

	March 31, 2012			December 31, 2011
Assets
Cash and cash equivalents	$	526,846		$	392,154
Restricted cash and cash equivalents	823,950			399,620
Securities	865,759			922,603
Corporate loans, net (includes $297,708 and $317,332 loans held for sale as of March 31, 2012 and December 31, 2011, respectively)	5,972,943			6,443,399
Equity investments, at estimated fair value ($15,528 and $12,222 pledged as collateral as of March 31, 2012 and December 31, 2011, respectively)	203,642			189,845
Derivative assets	31,109			28,463
Interest and principal receivable	38,336			62,124
Other assets	309,605			209,020
Total assets	$	8,772,190		$	8,647,228
Liabilities
Collateralized loan obligation secured debt	$	5,496,488		$	5,540,037
Collateralized loan obligation junior secured notes to affiliates	347,855			365,848
Credit facilities	66,800			38,300
Convertible senior notes	277,091			299,830
Senior notes	362,109			250,676
Junior subordinated notes	283,517			283,517
Accounts payable, accrued expenses and other liabilities	35,325			24,680
Accrued interest payable	20,659			25,536
Accrued interest payable to affiliates	7,102			6,561
Related party payable	16,827			11,078
Derivative liabilities	108,164			125,333
Total liabilities	7,021,937			6,971,396
Shareholders’ Equity
Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding at March 31, 2012 and December 31, 2011	—			—
Common shares, no par value, 500,000,000 shares authorized, and 178,393,521 and 178,145,482 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively	—			—
Paid-in-capital	2,759,996			2,759,478
Accumulated other comprehensive loss	(3,380		)	(35,619		)
Accumulated deficit	(1,006,363		)	(1,048,027		)
Total shareholders’ equity	1,750,253			1,675,832
Total liabilities and shareholders’ equity	$	8,772,190		$	8,647,228

See notes to condensed consolidated financial statements.

3

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except per share information)

	For the three months ended March 31, 2012			For the three months ended March 31, 2011
Net investment income:
Loan interest income	$	104,094		$	109,645
Securities interest income	22,576			22,556
Other investment income	11,264			3,129
Total investment income	137,934			135,330
Interest expense	40,715			32,121
Interest expense to affiliates	12,859			12,096
Provision for loan losses	46,498			11,661
Net investment income	37,862			79,452
Other income:
Net realized and unrealized gain on investments	63,588			39,184
Net realized and unrealized gain on derivatives and foreign exchange	9,149			6,067
Net realized and unrealized gain (loss) on residential mortgage-backed securities, at estimated fair value	3,047			(738		)
Net loss on restructuring and extinguishment of debt	(445		)	—
Other income	3,592			1,923
Total other income	78,931			46,436
Non-investment expenses:
Related party management compensation	18,113			21,201
General, administrative and directors expenses	12,804			8,171
Professional services	1,896			1,432
Total non-investment expenses	32,813			30,804
Income before income tax (benefit) expense	83,980			95,084
Income tax (benefit) expense	(4,068		)	1,317
Net income	$	88,048		$	93,767
Net income per common share:
Basic	$	0.49		$	0.53
Diluted	$	0.48		$	0.51
Weighted-average number of common shares outstanding:
Basic	177,775			177,075
Diluted	182,247			181,292

See notes to condensed consolidated financial statements.

4

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)

	Three months ended March 31, 2012			Three months ended March 31, 2011
Net income	$	88,048		$	93,767
Other comprehensive income:
Unrealized gains on securities available-for-sale:
Unrealized (losses) gains arising during period	(4,614		)	20,240
Reclassification adjustments for gains realized in net income	22,261			(7,336		)
Unrealized gains on securities available-for-sale	17,647			12,904
Unrealized gains on cash flow hedges	14,592			8,192
Total other comprehensive income	32,239			21,096
Comprehensive income	$	120,287		$	114,863

See notes to condensed consolidated financial statements.

5

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(Amounts in thousands)

	Common Shares		Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Shareholders’ Equity
Balance at January 1, 2012	178,145		$	2,759,478		$	(35,619	)	$	(1,048,027	)	$	1,675,832
Net income	—		—			—			88,048			88,048
Other comprehensive income	—		—			32,239			—			32,239
Cash distributions on common shares	—		—			—			(46,384		)	(46,384		)
Grant of restricted common shares	259		—			—			—			—
Repurchase and cancellation of common shares	(10	)	(96		)	—			—			(96		)
Share-based compensation expense related to restricted common shares	—		614			—			—			614
Balance at March 31, 2012	178,394		$	2,759,996		$	(3,380	)	$	(1,006,363	)	$	1,750,253

See notes to condensed consolidated financial statements.

6

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

	For the three monthsended March 31, 2012			For the three months ended March 31, 2011
Cash flows from operating activities:
Net income	$	88,048		$	93,767
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized and unrealized gain on derivatives and foreign exchange	(9,149		)	(6,067		)
Net loss on restructuring and extinguishment of debt	445			—
Write-off of debt issuance costs	386			450
Lower of cost or estimated fair value adjustment on corporate loans held for sale	(10,401		)	(1,567		)
Provision for loan losses	46,498			11,661
Impairment on securities available-for-sale and private equity investments at cost	733			975
Share-based compensation	614			1,833
Net realized and unrealized loss on residential mortgage-backed securities, at estimated fair value	(3,047		)	738
Net realized and unrealized gain on investments	(53,920		)	(38,592		)
Depreciation and net amortization	(16,146		)	(25,576		)
Changes in assets and liabilities:
Interest receivable	6,583			2,394
Other assets	(8,444		)	(2,800		)
Related party payable	5,749			2,778
Accounts payable, accrued expenses and other liabilities	1,103			(47		)
Accrued interest payable	(4,877		)	(6,613		)
Accrued interest payable to affiliates	541			748
Net cash provided by operating activities	44,716			34,082
Cash flows from investing activities:
Principal payments from corporate loans	621,928			551,504
Principal payments from securities available-for-sale and other securities, at estimated fair value	18,791			39,145
Principal payments from residential mortgage-backed securities, at estimated fair value	1,552			1,901
Proceeds from sale of corporate loans	167,981			62,750
Proceeds from sale of securities available-for-sale and other securities, at estimated fair value	93,641			32,992
Proceeds from sale of equity investments	3,216			6,020
Proceeds from securities sold, not yet purchased	—			20,401
Purchases of corporate loans	(291,143		)	(763,390		)
Purchases of securities available-for-sale and other securities, at estimated fair value	(13,085		)	(48,729		)
Purchases of equity and other investments	(89,946		)	(69,722		)
Cover securities sold, not yet purchased	—			(19,180		)
Net proceeds, purchases, and settlements of derivatives	(6,243		)	249
Net change in restricted cash and cash equivalents	(424,330		)	(19,811		)
Net cash provided by (used in) investing activities	82,362			(205,870		)
Cash flows from financing activities:
Issuance of collateralized loan obligation secured debt	31,876			125,837
Retirement of collateralized loan obligation secured debt	(93,888		)	(110,426		)
Retirement of collateralized loan obligation junior secured notes to affiliates	—			(276		)
Proceeds from credit facilities	28,500			—
Repayment of convertible senior notes	(23,495		)	—
Proceeds from senior notes	111,418			—
Distributions on common shares	(46,384		)	(26,719		)
Issuance of common shares	—			1,297
Repurchase and cancellation of common shares	(96		)	(1,297		)
Other capitalized costs	(317		)	(1,125		)
Net cash provided by (used in) financing activities	7,614			(12,709		)
Net increase (decrease) in cash and cash equivalents	134,692			(184,497		)
Cash and cash equivalents at beginning of period	392,154			313,829
Cash and cash equivalents at end of period	$	526,846		$	129,332
Supplemental cash flow information:
Cash paid for interest	$	49,640		$	41,879
Net cash paid for income taxes	$	45		$	31
Non-cash investing and financing activities:
Issuance of restricted common shares	$	2,446		$	2,355
Loans transferred from held for investment to held for sale	$	46,077		$	582,878
Loans transferred from held for sale to held for investment	$	7,504		$	97,857

See notes to condensed consolidated financial statements.

7

KKR Financial Holdings LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Note 1. Organization

KKR Financial Holdings LLC together with its subsidiaries (the “Company”) is a specialty finance company with expertise in a range of asset classes. The Company’s core business strategy is to leverage the proprietary resources of its manager with the objective of generating both current income and capital appreciation by deploying capital to its strategies, which include bank loans and high yield securities, natural resources, special situations, mezzanine, commercial real estate and private equity. The Company’s holdings across these strategies primarily consist of below investment grade syndicated corporate loans, also known as leveraged loans, high yield debt securities, private equity and working and royalty interests in oil and gas properties. The corporate loans that the Company holds are purchased via assignment or participation in the primary or secondary market.

The majority of the Company’s holdings consist of corporate loans and high yield debt securities held in collateralized loan obligation (“CLO”) transactions that are structured as on-balance sheet securitizations and are used as long term financing for the Company’s investments in corporate debt. The senior secured debt issued by the CLO transactions is generally owned by unaffiliated third party investors and the Company owns the majority of the mezzanine and subordinated notes in the CLO transactions. The Company executes its core business strategy through its majority-owned subsidiaries, including CLOs.

KKR Financial Advisors LLC (the “Manager”), a wholly-owned subsidiary of KKR Asset Management LLC, manages the Company pursuant to a management agreement (the “Management Agreement”). KKR Asset Management LLC is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P. (“KKR”).

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of the Company and entities established to complete secured financing transactions that are considered to be variable interest entities and for which the Company is the primary beneficiary.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The Company’s results for any interim period are not necessarily indicative of results for a full year or any other interim period. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from management’s estimates.

Consolidation

KKR Financial CLO 2005-1, Ltd. (“CLO 2005-1”), KKR Financial CLO 2005-2, Ltd. (“CLO 2005-2”), KKR Financial CLO 2006-1, Ltd. (“CLO 2006-1”), KKR Financial CLO 2007-1, Ltd. (“CLO 2007-1”), KKR Financial CLO 2007-A, Ltd. (“CLO 2007-A”) and KKR Financial CLO 2011-1, Ltd. (“CLO 2011-1”) are entities established to complete secured financing transactions. These entities are variable interest entities (“VIEs”) which the Company consolidates as the Company has determined it has the power to direct the activities that most significantly impact these entities’ economic performance and the Company has both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities. In CLO transactions, subordinated notes have the first risk of loss and conversely, the residual value upside of the transactions. These CLOs are considered non-recourse leverage to the Company.

The Company finances the majority of its corporate debt investments through its CLOs. As of March 31, 2012, the Company’s six CLOs, held $6.9 billion par amount, or $6.5 billion estimated fair value, of corporate debt investments. As of December 31, 2011, the Company’s six CLOs, held $7.4 billion par amount, or $6.8 billion estimated fair value, of corporate debt investments. The assets in each CLO can be used only to settle the debt of the related CLO. As of March 31, 2012, the aggregate CLO

8

debt totaled $5.5 billion of secured debt outstanding held by unaffiliated third parties and $347.9 million of junior secured notes outstanding held by an affiliate of the Manager. As of December 31, 2011, the aggregate CLO debt totaled $5.5 billion of secured debt outstanding held by unaffiliated third parties and $365.8 million of junior secured notes outstanding held by an affiliate of the Manager.

In addition, the Company continues to consolidate all non-VIEs in which it holds a greater than 50 percent voting interest.

All inter-company balances and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:

Level 1:  Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets generally included in this category are equity securities listed in active markets.

Level 2:  Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value and certain financial instruments classified as derivatives.

Level 3:  Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value, residential mortgage-backed securities (“RMBS”) and certain financial instruments classified as derivatives.

A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which the Company recognizes at the end of the reporting period.

Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that the Company and others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, the Company does not require that fair value always be a predetermined point in the bid-ask range. The Company’s policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets the Company’s best estimate of fair value.

9

Depending on the relative liquidity in the markets for certain assets, the Company may transfer assets to Level 3 if it determines that observable quoted prices, obtained directly or indirectly, are not available. The valuation techniques used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.

Corporate Debt Securities:  Corporate debt securities are initially valued at transaction price and are subsequently valued using market data for similar instruments (e.g., recent transactions or broker quotes), comparisons to benchmark derivative indices or valuation models. Valuation models are based on discounted cash flow techniques, for which the key inputs are the amount and timing of expected future cash flows, market yields for such instruments and recovery assumptions. Inputs are determined based on relative value analyses, which incorporate similar instruments from similar issuers.

Equity Investments, at Estimated Fair Value:  Equity investments, at estimated fair value, are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on a market and income (discounted cash flow) approaches, in which various internal and external factors are considered. Factors include the price at which the investment was acquired, the nature of the investment, current market conditions, recent public market and private transactions for comparable securities, and financing transactions subsequent to the acquisition of the investment. The fair value recorded for a particular investment will generally be within the range suggested by the two approaches.

Over-the-counter (“OTC”) Derivative Contracts:  OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit standing of reference entities, and equity prices. The fair value of OTC derivative products can be modeled using a series of techniques, including closed-form analytic formulae, such as the Black-Scholes option-pricing model, and simulation models or a combination thereof. Many pricing models do not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, as is the case for generic interest rate swap and option contracts.

Residential Mortgage-Backed Securities, at Estimated Fair Value:  Residential mortgage-backed securities are initially valued at transaction price and are subsequently valued using industry recognized models (including Intex and Bloomberg) and data for similar instruments (e.g., nationally recognized pricing services or broker quotes). The most significant inputs to the valuation of these instruments are default and loss expectations and market credit spreads.

Valuation Process

The valuation process involved in Level 3 measurements for assets and liabilities is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The Company has a valuation committee, whose members consist of the Company’s Chief Executive Officer, Chief Financial Officer, General Counsel and certain other employees of the Manager. The Company’s valuation committee is responsible for coordinating and implementing the Company’s quarterly valuation process. For assets classified as Level 3, the investment professionals are responsible for documenting preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and model projections discussed above, among other factors. The Company engages an independent valuation firm to opine on its valuations for certain holdings over a specific dollar threshold. All valuations are approved by the Company’s valuation committee.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash held in banks and highly liquid investments with original maturities of three months or less. Interest income earned on cash and cash equivalents is recorded in other investment income.

10

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents represent amounts that are held by third parties under certain of the Company’s financing and derivative transactions. Interest income earned on restricted cash and cash equivalents is recorded in other investment income.

On the condensed consolidated statement of cash flows, net additions or reductions to restricted cash and cash equivalents are classified as an investing activity as restricted cash and cash equivalents reflect the receipts from collections or sales of investments, as well as payments made to acquire investments held by third parties.

Securities

Securities Available-for-Sale

The Company classifies its investments in securities as available-for-sale as the Company may sell them prior to maturity and does not hold them principally for the purpose of selling them in the near term. These investments are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive (loss) income. Estimated fair values are based on quoted market prices, when available, on estimates provided by independent pricing sources or dealers who make markets in such securities, or internal valuation models when external sources of fair value are not available. Upon the sale of a security, the realized net gain or loss is computed on a weighted average cost basis. Purchases and sales of securities are recorded on the trade date.

The Company monitors its available-for-sale securities portfolio for impairments. A loss is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. The Company considers many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost and the severity of the decline, the amount of the unrealized loss, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. In addition, for debt securities, the Company considers its intent to sell the debt security, the Company’s estimation of whether or not it expects to recover the debt security’s entire amortized cost if it intends to hold the debt security, and whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery. For equity securities, the Company also considers its intent and ability to hold the equity security for a period of time sufficient for a recovery in value.

The amount of the loss that is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary is dependent on certain factors. If the security is an equity security or if the security is a debt security that the Company intends to sell or estimates that it is more likely than not that the Company will be required to sell before recovery of its amortized cost, then the impairment amount recognized in earnings is the entire difference between the estimated fair value of the security and its amortized cost. For debt securities that the Company does not intend to sell or estimates that it is not more likely than not to be required to sell before recovery, the impairment is separated into the estimated amount relating to credit loss and the estimated amount relating to all other factors. Only the estimated credit loss amount is recognized in earnings, with the remainder of the loss amount recognized in other comprehensive (loss) income.

Unamortized premiums and unaccreted discounts on securities available-for-sale are recognized in interest income over the contractual life, adjusted for actual prepayments, of the securities using the effective interest method.

Other Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain securities for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these securities. Other securities, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in income.

Residential Mortgage-Backed Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for its residential mortgage investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of its residential mortgage investments. RMBS, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in income.

Equity Investments, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain marketable equity securities and private equity investments. The Company elects the fair value option of accounting for private equity investments received through restructuring debt transactions or issued by an entity in which the Company may have significant influence. The Company elected the fair value option for certain equity investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these equity investments. Equity investments, at fair value, are managed based on overall value and potential returns. These equity investments carried at fair value are presented separately on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains and losses on investments on the condensed consolidated statements of operations.

11

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased consist of equity and debt securities that the Company has sold short. In order to facilitate a short sale, the Company borrows the securities from another party and delivers the securities to the buyer. The Company will be required to “cover” its short sale in the future through the purchase of the security in the market at the prevailing market price and deliver it to the counterparty from which it borrowed. The Company is exposed to a loss to the extent that the security price increases during the time from when the Company borrowed the security to when the Company purchases it in the market to cover the short sale. Securities sold, not yet purchased are presented within accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets with gains and losses reported in net realized and unrealized gains and losses on investments on the condensed consolidated statement of operations.

Corporate Loans, Net

Corporate Loans

Corporate loans are generally held for investment and the Company initially records loans at their purchase prices. The Company subsequently accounts for loans based on their outstanding principal plus or minus unaccreted purchase discounts and unamortized purchase premiums. Corporate loans that the Company transfers to held for sale are transferred at the lower of cost or estimated fair value.

Interest income on loans includes interest at stated coupon rates adjusted for accretion of purchase discounts and the amortization of purchase premiums. Unamortized premiums and unaccreted discounts are recognized in interest income over the contractual life, adjusted for actual prepayments, of the loans using the effective interest method.

A loan is typically placed on non-accrual status at such time as: (i) management believes that scheduled debt service payments may not be paid when contractually due; (ii) the loan becomes 90 days delinquent; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the underlying collateral securing the loan decreases below the Company’s carrying value of such loan. As such, loans placed on non-accrual status may or may not be contractually past due at the time of such determination. While on non-accrual status, previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using the cost-recovery method, cash-basis method or some combination of the two methods. A loan is placed back on accrual status when the ultimate collectability of the principal and interest is not in doubt.

The Company may modify corporate loans in transactions where the borrower is experiencing financial difficulty and a concession is granted to the borrower as part of the modification. These concessions may include a reduction in interest rate, payment extensions, forgiveness of principal, an exchange of assets or a combination thereof. Such modifications typically qualify as troubled debt restructurings. The Company may also identify receivables that are newly considered impaired and discloses the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired.

In addition, the Company may also modify corporate loans which usually involve changes in existing interest rates combined with changes of existing maturities to prevailing market rates/maturities for similar instruments at the time of modification. Such modifications typically do not meet the definition of a troubled debt restructuring since the respective borrowers are neither experiencing financial difficulty nor are seeking a concession as part of the modification.

The corporate loans the Company invests in are generally deemed in default upon the non-payment of a single interest payment or as a result of the violation of a covenant in the respective loan agreement. The Company charges-off a portion or all of its amortized cost basis in a corporate loan when it determines that it is uncollectible due to either: i) the estimation based on a recovery value analysis of a defaulted loan that less than the amortized cost amount will be recovered through the agreed upon restructuring of the loan or as a result of a bankruptcy process of the issuer of the loan; or ii) the determination by the Company to transfer a loan to held for sale with the loan having an estimated market value below the amortized cost basis of the loan.

Loans acquired with deteriorated credit quality are recorded at initial cost and interest income is recognized as the difference between the Company’s estimate of all cash flows that it will receive from the loan in excess of its initial investment on a level-yield basis over the life of the loan (accretable yield) using the effective interest method.

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Allowance for Loan Losses

The Company’s corporate loan portfolio is comprised of a single portfolio segment which includes one class of financing receivables, that is, high yield loans that are purchased via assignment or participation in either the primary or secondary market and are held primarily for investment. High yield loans are generally characterized as having below investment grade ratings or being unrated.

The Company’s allowance for loan losses represents its estimate of probable credit losses inherent in its corporate loan portfolio held for investment as of the balance sheet date. Estimating the Company’s allowance for loan losses involves a high degree of management judgment and is based upon a comprehensive review of the Company’s loan portfolio that is performed on a quarterly basis. The Company’s allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses pertains to specific loans that the Company has determined are impaired. The Company determines a loan is impaired when management estimates that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis the Company performs a comprehensive review of its entire loan portfolio and identifies certain loans that it has determined are impaired. Once a loan is identified as being impaired, the Company places the loan on non-accrual status, unless the loan is already on non-accrual status, and records a reserve that reflects management’s best estimate of the loss that the Company expects to recognize from the loan. The expected loss is estimated as being the difference between the Company’s current cost basis of the loan, including accrued interest receivable, and the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the loan’s observable estimated fair value may be used.

The unallocated component of the Company’s allowance for loan losses represents its estimate of probable losses inherent in the loan portfolio as of the balance sheet date where the specific loan that the loan loss relates to is indeterminable. The Company estimates the unallocated component of the allowance for loan losses through a comprehensive review of its loan portfolio and identifies certain loans that demonstrate possible indicators of impairment, including internally assigned credit quality indicators. This assessment excludes all loans that are determined to be impaired and as a result, an allocated reserve has been recorded as described in the preceding paragraph. Such indicators include, but are not limited to, the current and/or forecasted financial performance and liquidity profile of the issuer, specific industry or economic conditions that may impact the issuer, and the observable trading price of the loan if available. All loans are first categorized based on their assigned risk grade and further stratified based on the seniority of the loan in the issuer’s capital structure. The seniority classifications assigned to loans are senior secured, second lien and subordinate. Senior secured consists of loans that are the most senior debt in an issuer’s capital structure and therefore have a lower estimated loss severity than other debt that is subordinate to the senior secured loan. Senior secured loans often have a first lien on some or all of the issuer’s assets. Second lien consists of loans that are secured by a second lien interest on some or all of the issuer’s assets; however, the loan is subordinate to the first lien debt in the issuer’s capital structure. Subordinate consists of loans that are generally unsecured and subordinate to other debt in the issuer’s capital structure.

There are three internally assigned risk grades that are applied to loans that have not been identified as being impaired: high, moderate and low. High risk means that there is evidence of possible loss due to the financial or operating performance and liquidity of the issuer, industry or economic concerns specific to the issuer, or other factors that indicate that the breach of a covenant contained in the related loan agreement is possible. Moderate risk means that while there is not observable evidence of loss, there are issuer and/or industry specific trends that indicate a loss may have occurred. Low risk means that while there is no identified evidence of loss, there is the risk of loss inherent in the loan that has not been identified. All loans held for investment, with the exception of loans that have been identified as impaired, are assigned a risk grade of high, moderate or low.

The Company applies a range of default and loss severity estimates in order to estimate a range of loss outcomes upon which to base its estimate of probable losses that results in the determination of the unallocated component of the Company’s allowance for loan losses.

Corporate Loans Held for Sale

From time to time the Company makes the determination to transfer certain of its corporate loans from held for investment to held for sale. The decision to transfer a loan to held for sale is generally as a result of the Company determining that the respective loan’s credit quality in relation to the loan’s expected risk-adjusted return no longer meets the Company’s investment objective and/or the Company deciding to reduce or eliminate its exposure to a particular loan for risk management purposes. Corporate loans held for sale are stated at lower of cost or estimated fair value and are assessed on an individual basis. Prior to transferring a loan to held for sale, any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to the yield by the interest method. The loan is transferred from held for investment to held for sale at the lower of its cost or estimated fair value and is carried at the lower of its cost or estimated fair value thereafter. Subsequent to transfer and while the loan is held for sale, recognition as an adjustment to yield by the interest method is discontinued for any difference between the carrying amount of the loan and its outstanding principal balance.

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From time to time the Company also makes the determination to transfer certain of its corporate loans from held for sale back to held for investment. The decision to transfer a loan back to held for investment is generally as a result of the circumstances that led to the initial transfer to held for sale no longer being present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy. The loan is transferred from held for sale back to held for investment at the lower of its cost or estimated fair value, whereby a new cost basis is established based on this amount.

Interest income on corporate loans classified as held for sale is recognized through accrual of the stated coupon rate for the loans, unless the loans are placed on non-accrual status, at which point previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using either the cost-recovery method or on a cash-basis.

Corporate Loans, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain corporate loans for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these corporate loans. Corporate loans carried at estimated fair value are included within corporate loans, net on the condensed consolidated balance sheets with unrealized gains and losses reported in income.

Long-Lived Assets

The Company evaluates its proved oil and natural gas properties and related equipment and facilities for impairment whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. For the three months ended March 31, 2012 and 2011, the Company recorded an immaterial amount and zero, respectively, of impairments related to its oil and natural gas assets, which are included in other assets on the condensed consolidated balance sheets.

Borrowings

The Company finances the majority of its investments through the use of secured borrowings in the form of securitization transactions structured as non-recourse secured financings and other secured and unsecured borrowings. In addition, the Company finances certain of its oil and gas asset acquisitions through borrowings. The Company recognizes interest expense on all borrowings on an accrual basis.

Trust Preferred Securities

Trusts formed by the Company for the sole purpose of issuing trust preferred securities are not consolidated by the Company as the Company has determined that it is not the primary beneficiary of such trusts. The Company’s investment in the common securities of such trusts is included in other assets on the condensed consolidated balance sheets.

Derivative Financial Instruments

The Company recognizes all derivatives on the condensed consolidated balance sheet at estimated fair value. On the date the Company enters into a derivative contract, the Company designates and documents each derivative contract as one of the following at the time the contract is executed: (i) a hedge of a recognized asset or liability (“fair value” hedge); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (iii) a hedge of a net investment in a foreign operation; or (iv) a derivative instrument not designated as a hedging instrument (“free-standing derivative”). For a fair value hedge, the Company records changes in the estimated fair value of the derivative instrument and, to the extent that it is effective, changes in the fair value of the hedged asset or liability in the current period earnings in the same financial statement category as the hedged item. For a cash flow hedge, the Company records changes in the estimated fair value of the derivative to the extent that it is effective in other comprehensive (loss) income and subsequently reclassifies these changes in estimated fair value to net income in the same period(s) that the hedged transaction affects earnings. The effective portion of the cash flow hedges is recorded in the same financial statement category as the hedged item. For free-standing derivatives, the Company reports changes in the fair values in other income (loss).

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The Company formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Company’s evaluation of effectiveness of its hedged transactions. Periodically, the Company also formally assesses whether the derivative it designated in each hedging relationship is expected to be and has been highly effective in offsetting changes in estimated fair values or cash flows of the hedged item using either the dollar offset or the regression analysis method. If the Company determines that a derivative is not highly effective as a hedge, it discontinues hedge accounting.

Foreign Currency

The Company makes investments in non-United States dollar denominated securities and loans. As a result, the Company is subject to the risk of fluctuation in the exchange rate between the United States dollar and the foreign currency in which it makes an investment. In order to reduce the currency risk, the Company may hedge the applicable foreign currency. All investments denominated in a foreign currency are converted to the United States dollar using prevailing exchange rates on the balance sheet date. Income, expenses, gains and losses on investments denominated in a foreign currency are converted to the United States dollar using the prevailing exchange rates on the dates when they are recorded. Foreign exchange gains and losses are recorded in the condensed consolidated statements of operations.

Manager Compensation

The Management Agreement provides for the payment of a base management fee to the Manager, as well as an incentive fee if the Company’s financial performance exceeds certain benchmarks. Additionally, the Management Agreement provides for the Manager to be reimbursed for certain expenses incurred on the Company’s behalf. See Note 11 to these condensed consolidated financial statements for additional discussion on the payment of the base management fee and incentive fee. The base management fee and the incentive fee are accrued and expensed during the period for which they are earned by the Manager.

Share-Based Compensation

The Company accounts for share-based compensation issued to its directors and to its Manager using the fair value based methodology in accordance with relevant accounting guidance. Compensation cost related to restricted common shares issued to the Company’s directors is measured at its estimated fair value at the grant date, and is amortized and expensed over the vesting period on a straight-line basis. Compensation cost related to restricted common shares and common share options issued to the Manager is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards are unvested. The Company has elected to use the graded vesting attribution method to amortize compensation expense for the restricted common shares and common share options granted to the Manager.

Income Taxes

The Company intends to continue to operate so as to qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation. Therefore, the Company generally is not subject to United States federal income tax at the entity level, but is subject to limited state and foreign taxes. Holders of the Company’s shares will be required to take into account their allocable share of each item of the Company’s income, gain, loss, deduction, and credit for the taxable year of the Company ending within or with their taxable year.

During 2012, the Company owned an equity interest in KKR Financial Holdings II, LLC (“KFH II”), which elected to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). KFH II holds certain real estate mortgage-backed securities. A REIT generally is not subject to United States federal income tax to the extent that it currently distributes its income and satisfies certain asset, income and ownership tests, and recordkeeping requirements, but it may be subject to some amount of federal, state, local and foreign taxes based on its taxable income.

The Company has wholly-owned domestic and foreign subsidiaries that are taxable as corporations for United States federal income tax purposes and thus are not consolidated with the Company for United States federal income tax purposes. For financial reporting purposes, current and deferred taxes are provided for on the portion of earnings recognized by the Company with respect to its interest in the domestic taxable corporate subsidiaries, because each is taxed as a regular corporation under the Code. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP condensed consolidated financial statements and the United States federal income tax basis of assets and liabilities as of each condensed consolidated balance sheet date. The foreign corporate subsidiaries were formed to make certain foreign and domestic investments from time to time. The foreign corporate subsidiaries are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands, and are anticipated to be exempt from United States federal and state income tax at the corporate entity level because they restrict their activities in the United States to trading in stock and securities for their own account. However, the Company will be required to

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include their current taxable income in the Company’s calculation of its taxable income allocable to shareholders.

The Company must recognize the tax impact from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax impact recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain tax positions are recorded as tax expense. Significant judgment is required in the identification of uncertain tax positions and in the estimation of penalties and interest on uncertain tax positions. If it is determined that recognition for an uncertain tax provision is necessary, the Company would record a liability for an unrecognized tax expense from an uncertain tax position taken or expected to be taken.

Earnings Per Share

The Company presents both basic and diluted earnings per common share (“EPS”) in its condensed consolidated financial statements and footnotes thereto. Basic earnings per common share (“Basic EPS”) excludes dilution and is computed by dividing net income or loss by the weighted average number of common shares, including vested restricted common shares, outstanding for the period. The Company calculates EPS using the more dilutive of the two-class method or the if-converted method. The two-class method is an earnings allocation formula that determines EPS for common shares and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS using the two-class method. Accordingly, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Diluted earnings (loss) per share (“Diluted EPS”) reflects the potential dilution of common share options and unvested restricted common shares using the treasury method, as well as the potential dilution of convertible senior notes using the number of shares it would take to satisfy the excess conversion obligation (average Company share price for the period in excess of the conversion price related to the Company’s convertible senior notes), if they are not anti-dilutive.

Note 3. Earnings per Share

The following table presents a reconciliation of basic and diluted net income per common share for the three months ended March 31, 2012 and 2011 (amounts in thousands, except per share information), as well as the distributions declared per common share during the quarters ended March 31, 2012 and 2011:

	Three months ended March 31, 2012		Three months ended March 31, 2011
Income from continuing operations	$	88,048	$	93,767
Less: Dividends and undistributed earnings allocated to participating securities	297		612
Net income applicable to common shareholders	$	87,751	$	93,155
Basic:
Basic weighted average shares outstanding	177,775		177,075
Net income per share	$	0.49	$	0.53
Diluted:
Basic weighted average shares outstanding	177,775		177,075
Dilutive effect of convertible senior notes	4,472		4,217
Diluted weighted average shares outstanding(1)	182,247		181,292
Net income per share	$	0.48	$	0.51
Distributions declared per common share	$	0.26	$	0.15

(1)Potential anti-dilutive common shares excluded from diluted earnings per share related to common share options were 1,932,279 for the three months ended March 31, 2012 and 2011.

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Note 4. Securities

The Company accounts for securities based on the following categories: (i) securities available-for-sale, which are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive (loss) income; (ii) other securities, at estimated fair value, with unrealized gains and losses recorded in the condensed consolidated statements of operations; and (iii) residential mortgage-backed securities, at estimated fair value, with unrealized gains and losses recorded in the condensed consolidated statements of operations.

The following table summarizes the Company’s securities as of March 31, 2012, which are carried at estimated fair value (amounts in thousands):

	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale:
Corporate debt securities	$	667,095	$	86,379	$	(7,637	)	$	745,837
Common and preferred stock	5,330		1,153		—			6,483
Total securities available-for-sale	672,425		87,532		(7,637		)	752,320
Other securities, at estimated fair value(1)	21,889		4,641		(454		)	26,076
Residential mortgage-backed securities, at estimated fair value(1)	202,588		4,221		(119,446		)	87,363
Total securities	$	896,902	$	96,394	$	(127,537	)	$	865,759

(1)Unrealized gains and losses are recorded in earnings.

The following table summarizes the Company’s securities as of December 31, 2011, which are carried at estimated fair value (amounts in thousands):

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale:
Corporate debt securities	$	741,438	$	75,442	$	(13,637	)	$	803,243
Common and preferred stock	12,766		444		—			13,210
Total securities available-for-sale	754,204		75,886		(13,637		)	816,453
Other securities, at estimated fair value(1)	16,467		3,225		(21		)	19,671
Residential mortgage-backed securities, at estimated fair value(1)	209,502		4,132		(127,155		)	86,479
Total securities	$	980,173	$	83,243	$	(140,813	)	$	922,603

(1)Unrealized gains and losses are recorded in earnings.

The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale securities, aggregated by length of time that the individual securities have been in a continuous unrealized loss position as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	Less Than 12 months					12 Months or More					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
March 31, 2012
Corporate debt securities	$	102,509	$	(5,403	)	$	11,402	$	(2,234	)	$	113,911	$	(7,637	)
December 31, 2011
Corporate debt securities	$	252,467	$	(10,562	)	$	32,876	$	(3,075	)	$	285,343	$	(13,637	)

The unrealized losses in the table above are considered to be temporary impairments due to market factors and are not reflective of credit deterioration. The Company considers many factors when evaluating whether an impairment is other-than-temporary. For corporate debt securities included in the table above, the Company does not intend to sell them and does not believe that it is more likely than not that the Company will be required to sell any of its corporate debt securities prior to recovery. In addition, based on the analyses performed by the Company on each of its corporate debt securities, the Company believes that it is able to recover the entire amortized cost amount of the corporate debt securities included in the table above.

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During the three months ended March 31, 2012 and 2011, the Company recognized losses totaling $0.7 million and zero, respectively, for corporate debt securities that it determined to be other-than-temporarily impaired based on the criteria above. The Company intends to sell these securities and as a result, the entire amount is recorded through earnings in net realized and unrealized gain on investments in the condensed consolidated statements of operations.

For common and preferred stock, the Company considers many factors when evaluating whether an impairment is other-than-temporary, including its intent and ability to hold the common and preferred stock for a period of time sufficient for recovery to cost. If the Company believes it will not recover the cost basis based on its intent or ability, an other-than-temporary loss will be recorded through earnings in net realized and unrealized gain on investments in the condensed consolidated statements of operations.

During both the three months ended March 31, 2012 and 2011, the Company recognized no losses for common and preferred stock that it determined to be other-than-temporary impaired.

As of both March 31, 2012 and December 31, 2011, the Company had no corporate debt securities in default.

Corporate debt securities sold at a loss typically include those that the Company determined to be other-than-temporarily impaired or had a deteriorated credit quality. The following table shows the net realized gains on the sales of securities available-for-sale (amounts in thousands):

	For the three months ended March 31, 2012		For the three months ended March 31, 2011
Gross realized gains	$	7,581	$	7,408
Gross realized losses	—		(72		)
Net realized gains (1)	$	7,581	$	7,336

(1)Excludes net realized gains from paydowns and restructurings totaling $16.2 million, including a $0.8 million premium on bond redemption, and zero for the three months ended March 31, 2012 and 2011, respectively. Also, excludes an impairment charge of $0.7 million and zero for investments which were determined to be other-than-temporary for the three months ended March 31, 2012 and 2011.

The Company’s securities available-for-sale portfolio has certain credit risk concentrated in a limited number of issuers. As of March 31, 2012, approximately 49% of the estimated fair value of the Company’s securities available-for-sale portfolio was concentrated in ten issuers, with the two largest concentrations of securities available-for-sale in securities issued by First Data Corporation and SandRidge Energy, Inc., which combined represented $140.5 million, or approximately 19% of the estimated fair value of the Company’s securities available-for-sale. As of December 31, 2011, approximately 46% of the estimated fair value of the Company’s securities available-for-sale portfolio was concentrated in ten issuers, with the two largest concentrations of securities available-for-sale in securities issued by First Data Corporation and SandRidge Energy, Inc., which combined represented $138.3 million, or approximately 17% of the estimated fair value of the Company’s securities available-for-sale.

Note 6 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged securities for borrowings. The following table summarizes the estimated fair value of securities available-for-sale pledged as collateral as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	As of March 31, 2012		As of December 31, 2011
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	663,534	$	710,734
Total	$	663,534	$	710,734

As of March 31, 2012 and December 31, 2011, no other securities, at estimated fair value or RMBS were pledged as collateral for the Company’s borrowings.

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Note 5. Corporate Loans and Allowance for Loan Losses

The Company accounts for loans based on the following categories (i) corporate loans held for investment, which are measured based on their outstanding principal plus or minus unaccreted purchase discounts and unamortized purchase premiums, net of an allowance for loan losses; (ii) corporate loans held for sale, which are measured at lower of cost or estimated fair value; and (iii) corporate loans, at estimated fair value, which are measured at fair value.

The following table summarizes the Company’s corporate loans as of March 31, 2012 (amounts in thousands):

	March 31, 2012
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,056,204		$	434,336		$	12,411		$	6,502,951
Net unamortized discount	(155,091		)	(97,031		)	(3,634		)	(255,756		)
Total amortized cost	5,901,113			337,305			8,777			6,247,195
Lower of cost or fair value adjustment	—			(39,597		)	—			(39,597		)
Allowance for loan losses	(235,807		)	—			—			(235,807		)
Unrealized gains	—			—			1,152			1,152
Net carrying value	$	5,665,306		$	297,708		$	9,929		$	5,972,943

(1)Principal amount is net of cumulative charge-offs and other adjustments totaling $83.8 million as of March 31, 2012.

The following table summarizes the Company’s corporate loans as of December 31, 2011 (amounts in thousands):

	December 31, 2011
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,501,679		$	470,562		$	3,655		$	6,975,896
Net unamortized discount	(187,381		)	(102,324		)	(562		)	(290,267		)
Total amortized cost	6,314,298			368,238			3,093			6,685,629
Lower of cost or fair value adjustment	—			(50,906		)	—			(50,906		)
Allowance for loan losses	(191,407		)	—			—			(191,407		)
Unrealized gains	—			—			83			83
Net carrying value	$	6,122,891		$	317,332		$	3,176		$	6,443,399

(1)Principal amount is net of cumulative charge-offs and other adjustments totaling $79.8 million as of December 31, 2011.

Allowance For Loan Losses

As of March 31, 2012 and December 31, 2011, the Company had an allowance for loan losses of $235.8 million and $191.4 million, respectively. As described in Note 2 to these condensed consolidated financial statements, the allowance for loan losses represents the Company’s estimate of probable credit losses inherent in its loan portfolio as of the balance sheet date. The Company’s allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses consists of individual loans that are impaired. The unallocated component of the allowance for loan losses represents the Company’s estimate of losses inherent, but not identified, in its portfolio as of the balance sheet date.

The following table summarizes the changes in the allowance for loan losses for the Company’s corporate loan portfolio during the three months ended March 31, 2012 and 2011 (amounts in thousands):

	For the three months ended March 31, 2012			For the three months ended March 31, 2011
Allowance for loan losses:
Beginning balance	$	191,407		$	209,030
Provision for loan losses	46,498			11,661
Charge-offs	(2,098		)	(22,109		)
Ending balance	$	235,807		$	198,582

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The following table summarizes the ending balances of the allowance and corporate loans portfolio by basis of impairment method as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	March 31, 2012		December 31, 2011
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	235,807	$	191,407
Ending balance: collectively evaluated for impairment	—		—
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	235,807	$	191,407
Corporate loans (recorded investment)(1):
Ending balance: individually evaluated for impairment	$	5,917,667	$	6,334,232
Ending balance: collectively evaluated for impairment	—		—
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	5,917,667	$	6,334,232

(1)           Recorded investment is defined as amortized cost plus accrued interest.

As of March 31, 2012, the allocated component of the allowance for loan losses totaled $34.5 million and relates to investments in certain loans issued by five issuers with an aggregate par amount of $84.0 million and an aggregate recorded investment of $69.0 million. As of December 31, 2011, the allocated component of the allowance for loan losses totaled $33.8 million and relates to investments in certain loans issued by five issuers with an aggregate par amount of $83.5 million and an aggregate recorded investment of $68.7 million.

The following table summarizes the Company’s recorded investment in impaired loans and the related allowance for credit losses for the three months ended March 31, 2012 and year ended December 31, 2011 (amounts in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2012
With no related allowance recorded	$	—	$	—	$	—	$	—	$	—
With an allowance recorded	69,028		84,005		34,456		68,860		803
Total	$	69,028	$	84,005	$	34,456	$	68,860	$	803

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2011
With no related allowance recorded	$	—	$	—	$	—	$	3,244	$	—
With an allowance recorded	68,692		83,452		33,836		76,933		2,645
Total	$	68,692	$	83,452	$	33,836	$	80,177	$	2,645

As of March 31, 2012 and December 31, 2011, the allocated component of the allowance for loan losses included all impaired loans. While all of the Company’s impaired loans are on non-accrual status, the Company’s non-accrual loans also include those held for sale that are measured at the lower of cost or fair value and are not reflected in the table above.

The following table summarizes the Company’s recorded investment in non-accrual loans as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	March 31, 2012		December 31, 2011
Impaired loans held for investment	$	69,028	$	68,692
Loans held for sale	100,291		99,999
Total non-accrual loans	$	169,319	$	168,691

The amount of interest income recognized using the cash-basis method during the time within the period that the loans were impaired was $4.4 million, which included $0.8 million for impaired loans that were held for investment and $3.6 million for non-accrual loans held for sale for the three months ended March 31, 2012. The amount of interest income recognized using the cash-basis method during the time within the period that the loans were impaired was $4.0 million, which included $0.4 million for impaired loans that were held for investment and $3.6 million for non-accrual loans held for sale for the three months ended March 31, 2011.

The Company did not have any corporate loans past due at March 31, 2012 and 2011.

20

The unallocated component of the allowance for loan losses totaled $201.3 million and $157.6 million as of March 31, 2012 and December 31, 2011, respectively. As described in Note 2 to these condensed consolidated financial statements, the Company estimates the unallocated components of the allowance for loan losses through a comprehensive review of its loan portfolio and identifies certain loans that demonstrate possible indicators of impairments, including credit quality indicators. The following table summarizes how the Company determines internally assigned grades related to credit quality based on a combination of concern as to probability of default and the seniority of the loan in the issuer’s capital structure as of March 31, 2012 and December 31, 2011 (amounts in thousands):

Internally Assigned Grade	Capital Hierarchy	Recorded Investment March 31, 2012 (1)		Recorded Investment December 31, 2011 (1)
High	Senior Secured Loan	$	777,054	$	926,258
	Second Lien Loan	295,239		310,971
	Subordinated	10,349		14,392
		$	1,082,642	$	1,251,621
Moderate	Senior Secured Loan	$	585,694	$	645,939
	Second Lien Loan	—		—
	Subordinated	—		6,951
		$	585,694	$	652,890
Low	Senior Secured Loan	$	4,011,616	$	4,184,094
	Second Lien Loan	126,238		65,695
	Subordinated	42,449		111,240
		$	4,180,303	$	4,361,029
	Total Unallocated	$	5,848,639	$	6,265,540
	Total Allocated	69,028		68,692
	Total Loans Held for Investment	$	5,917,667	$	6,334,232

(1)Recorded investment is defined as amortized cost plus accrued interest.

During the three months ended March 31, 2012 and 2011, the Company recorded charge-offs totaling $2.1 million and $22.1 million, respectively, comprised primarily of loans transferred to loans held for sale.

Loans Held For Sale and the Lower of Cost or Fair Value Adjustment

As of March 31, 2012 and December 31, 2011, the Company had $297.7 million and $317.3 million of loans held for sale, respectively. During the three months ended March 31, 2012 and 2011, the Company transferred $46.1 million and $582.8 million amortized cost amount, respectively, of loans from held for investment to held for sale. The transfers of certain loans to held for sale were due to the Company’s determination that credit quality of a loan in relation to its expected risk-adjusted return no longer met the Company’s investment objective and the determination by the Company to reduce or eliminate the exposure for certain loans as part of its portfolio risk management practices. Also, during the three months ended March 31, 2012 and 2011, the Company transferred $7.5 million and $97.9 million amortized cost amount, respectively, from loans held for sale back to loans held for investment as the circumstances that led to the initial transfer to held for sale were no longer present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy.

The Company reduced the lower of cost or market valuation allowance by $10.4 million for the three months ended March 31, 2012 for certain loans held for sale, which had a carrying value of $297.7 million as of March 31, 2012. The Company reduced the lower of cost or market valuation allowance by $1.6 million for the three months ended March 31, 2011 for certain loans held for sale, which had a carrying value of $869.8 million as of March 31, 2011.

Defaulted Loans

As of March 31, 2012, the Company held corporate loans that were in default with a total amortized cost of $27.6 million from one issuer. These loans in default were included in the loans for which the allocated component of the Company’s allowance for loan losses was related to, or for which the Company determined were loans held for sale as of March 31, 2012. As of December 31, 2011, the Company had no corporate loans in default.

21

Troubled Debt Restructurings

The Company did not modify any loans that qualified as troubled debt restructurings during the three months ended March 31, 2012 and 2011.

The Company modified $457.1 million and $540.4 million amortized cost of corporate loans during the three months ended March 31, 2012 and 2011, respectively, that did not qualify as troubled debt restructurings. These modifications involved changes in existing rates and maturities to prevailing market rates/maturities for similar instruments and did not qualify as troubled debt restructurings as the respective borrowers were neither experiencing financial difficulty nor were seeking (nor granted) a concession as part of the modification. In addition, these modifications of non-troubled debt holdings were accomplished with modified loans that were not substantially different from the loans prior to modification.

Concentration Risk

The Company’s corporate loan portfolio has certain credit risk concentrated in a limited number of issuers. As of March 31, 2012, approximately 48% of the total amortized cost basis of the Company’s corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foodservice, Texas Competitive Electric Holdings Company LLC and Modular Space Corporation, which combined represented $993.9 million or approximately 16% of the aggregated amortized cost basis of the Company’s corporate loans. As of December 31, 2011, approximately 47% of the total amortized cost basis of the Company’s corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foodservice, Texas Competitive Electric Holdings Company LLC and Modular Space Corporation, which combined represented $992.5 million, or approximately 15% of the aggregated amortized cost basis of the Company’s corporate loans.

Note 6 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged loans for borrowings. The following table summarizes the amortized cost of corporate loans and corporate loans held for sale pledged as collateral as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	As of March 31, 2012		As ofDecember 31, 2011
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	6,017,183	$	6,448,404
Total	$	6,017,183	$	6,448,404

As of March 31, 2012 and December 31, 2011, no corporate loans, at estimated fair value were pledged as collateral for the Company’s borrowings.

Note 6. Borrowings

Certain information with respect to the Company’s borrowings as of March 31, 2012 is summarized in the following table (dollar amounts in thousands):

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Fair Value of Collateral(1)
CLO 2005-1 senior secured notes	$	697,551	0.89	%	1,852	$	681,388
CLO 2005-2 senior secured notes	700,159		0.81		2,066	763,051
CLO 2006-1 senior secured notes	683,265		0.86		2,338	866,266
CLO 2007-1 senior secured notes	2,075,040		1.05		3,332	2,328,919
CLO 2007-1 junior secured notes(2)	111,476		—		3,332	125,115
CLO 2007-A senior secured notes	786,763		1.53		2,024	846,882
CLO 2007-A junior secured notes(3)	10,821		—		2,024	11,648
CLO 2011-1 senior debt	431,413		1.91		2,328	500,645
Total collateralized loan obligation secured debt	5,496,488					6,123,914
CLO 2007-1 junior secured notes to affiliates(4)	282,403		—		3,332	316,955
CLO 2007-A junior secured notes to affiliates(5)	65,452		—		2,024	70,453
Total collateralized loan obligation junior secured notes to affiliates	347,855					387,408
Senior secured credit facility	—		3.72		763	—
Asset-based borrowing facility(6)	66,800		2.87		1,314	160,350
Total credit facilities	66,800					160,350
7.0% Convertible senior notes	112,036		7.00		106	—
7.5% Convertible senior notes	165,055		7.50		1,751	—
8.375% Senior notes	250,690		8.38		10,821	—
7.500% Senior notes	111,419		7.50		10,946	—
Junior subordinated notes	283,517		5.54		8,987	—
Total borrowings	$	6,833,860				$	6,671,672

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(1)Collateral for borrowings consists of corporate loans, securities available-for-sale and equity investments, at estimated fair value.

(2)CLO 2007-1 junior secured notes consist of $105.7 million of mezzanine notes with a weighted average borrowing rate of 3.2% and $5.8 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(3)CLO 2007-A junior secured notes consist of $6.2 million of mezzanine notes with a weighted average borrowing rate of 7.3% and $4.6 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(4)CLO 2007-1 junior secured notes to affiliates consist of $152.1 million of mezzanine notes with a weighted average borrowing rate of 5.7% and $130.3 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(5)CLO 2007-A junior secured notes to affiliates consist of $55.0 million of mezzanine notes with a weighted average borrowing rate of 6.7% and $10.5 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(6)Collateral for borrowings consists of oil and gas assets, presented at carrying value, purchased for an aggregate purchase price of approximately $158.9 million, whereby an immaterial impairment was deemed to exist as of March 31, 2012. These oil and gas assets are included in other assets in the condensed consolidated balance sheets at carrying amount of $160.4 million.

Certain information with respect to the Company’s borrowings as of December 31, 2011 is summarized in the following table (dollar amounts in thousands):

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Fair Value of Collateral(1)
CLO 2005-1 senior secured notes	$	715,354	0.75	%	1,943	$	798,876
CLO 2005-2 senior secured notes	745,226		0.83		2,157	870,712
CLO 2006-1 senior secured notes	683,265		0.87		2,429	884,873
CLO 2007-1 senior secured notes	2,075,040		1.01		3,423	2,343,420
CLO 2007-1 junior secured notes(2)	61,491		—		3,423	69,444
CLO 2007-A senior secured notes	812,318		1.36		2,115	900,660
CLO 2007-A junior secured notes(3)	10,821		—		2,115	11,997
CLO 2011-1 senior debt	436,522		1.77		2,419	557,389
Total collateralized loan obligation secured debt	5,540,037					6,437,371
CLO 2007-1 junior secured notes to affiliates(4)	300,396		—		3,423	337,407
CLO 2007-A junior secured notes to affiliates(5)	65,452		—		2,115	72,570
Total collateralized loan obligation junior secured notes to affiliates	365,848					409,977
Senior secured credit facility	—		3.83		854	—
Asset-based borrowing facility(6)	38,300		2.53		1,405	86,874
Total credit facilities	38,300					86,874
7.0% Convertible senior notes	135,086		7.00		197	—
7.5% Convertible senior notes	164,744		7.50		1,842	—
8.375% Senior notes	250,676		8.38		10,912	—
Junior subordinated notes	283,517		5.48		9,078	—
Total borrowings	$	6,778,208				$	6,934,222

23

(1)Collateral for borrowings consists of corporate loans, securities available-for-sale and equity investments, at estimated fair value.

(2)CLO 2007-1 junior secured notes consist of $55.7 million of mezzanine notes with a weighted average borrowing rate of 3.7% and $5.8 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(3)CLO 2007-A junior secured notes consist of $6.2 million of mezzanine notes with a weighted average borrowing rate of 7.1% and $4.6 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(4)CLO 2007-1 junior secured notes to affiliates consist of $170.1 million of mezzanine notes with a weighted average borrowing rate of 5.3% and $130.3 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(5)CLO 2007-A junior secured notes to affiliates consist of $55.0 million of mezzanine notes with a weighted average borrowing rate of 6.6% and $10.5 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(6)Collateral for borrowings consists of oil and gas assets, presented at carrying value, purchased for an aggregate purchase price of approximately $89.1 million, whereby no impairment was deemed to exist. These oil and gas assets are included in other assets in the condensed consolidated balance sheets at carrying amount of $86.9 million.

CLO Debt

The indentures governing the Company’s CLO transactions stipulate the reinvestment period during which the collateral manager, which is an affiliate of the Company’s Manager, can generally sell or buy assets at its discretion and can reinvest principal proceeds into new assets. CLO 2007-A ended its reinvestment period during the fourth quarter of 2010 and both CLO 2005-1 and CLO 2005-2 ended their reinvestment periods in the second quarter of 2011. As a result, principal proceeds from the assets held in each of these transactions are generally used to amortize the outstanding balance of senior notes outstanding. During the three months ended March 31, 2012, $88.8 million of original CLO 2007-A, CLO 2005-1 and CLO 2005-2 senior notes were repaid. CLO 2006-1 and CLO 2007-1 will end their respective reinvestment periods during August 2012 and May 2014, respectively. CLO 2011-1 does not have a reinvestment period and all principal proceeds from holdings in CLO 2011-1 will be used to amortize the transaction. During the three months ended March 31, 2012, $5.1 million of original CLO 2011-1 senior notes were repaid. During the three months ended March 31, 2011, $110.4 million of original CLO 2007-A senior notes were repaid.

On March 31, 2011, the Company closed CLO 2011-1, a $400.0 million secured financing transaction secured by the assets held in CLO 2011-1. At closing, the Company entered into a senior loan agreement (the “CLO 2011-1 Agreement”) through which CLO 2011-1 was able to borrow up to $300.0 million through a non-recourse loan secured by the assets held in CLO 2011-1. On July 6, 2011, the Company amended the CLO 2011-1 Agreement to upsize the transaction to $600.0 million, whereby CLO 2011-1 is able to borrow up to an additional $150.0 million, or total of $450.0 million. Under the amended CLO 2011-1 Agreement, the CLO 2011-1 senior loan matures on August 15, 2018 and borrowings under the CLO 2011-1 Agreement bear interest at a rate of the three-month London interbank offered rate (“LIBOR”) plus 1.35%. As of March 31, 2012 and December 31, 2011, the Company had $431.4 million and $436.5 million, respectively, of borrowings outstanding under the CLO 2011-1 Agreement.

During the first quarter of 2012, the Company issued $42.0 million par amount of CLO 2007-1 class D notes for proceeds of $31.9 million.

Credit Facilities

Senior Secured Credit Facility

The Company has available a $250.0 million asset-based revolving credit facility (the “2014 Facility”), maturing on May 3, 2014, that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified financial assets. The 2014 Facility bears interest at a rate equal to LIBOR plus 3.25% per annum and contains customary covenants applicable to the Company, including a restriction from making annual distributions to holders of common shares in excess of 65% of the Company’s estimated annual taxable income calculated in accordance with the 2014 Facility credit agreement.

24

As of March 31, 2012, the Company had no borrowings outstanding under the 2014 Facility.

Asset-Based Borrowing Facility

On January 31, 2012, the Company entered into an amendment to its credit agreement to further increase its five-year non-recourse, asset-based revolving credit facility (the “2015 Natural Resources Facility”), maturing on November 5, 2015, from $81.1 million to $137.2 million, that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified oil and gas assets.

The borrowing base is subject to certain caps and concentration limits customary for financings of this type. The Company has the right to prepay loans under the 2015 Natural Resources Facility in whole or in part at any time. Loans under the 2015 Natural Resources Facility bear interest at a rate equal to LIBOR plus a tiered applicable margin ranging from 1.75% to 2.75% per annum. The 2015 Natural Resources Facility contains customary covenants applicable to the Company.

As of March 31, 2012 and December 31, 2011, the Company had $66.8 million and $38.3 million, respectively, of borrowings outstanding under the 2015 Natural Resources Facility. In addition, under the 2015 Natural Resources Facility, the Company had a letter of credit outstanding totaling $1.0 million.

As of March 31, 2012, the Company believes it was in compliance with the covenant requirements for both credit facilities.

Convertible Debt

In 2010, the Company issued $172.5 million of 7.5% convertible senior notes due January 15, 2017 (“7.5% Notes”), resulting in net proceeds of $167.3 million. Holders of the 7.5% Notes may convert their notes at the applicable conversion rate at any time prior to the close of business on the business day immediately preceding the stated maturity date subject to the Company’s right to terminate the conversion rights of the notes. The Company may satisfy its obligation with respect to the 7.5% Notes tendered for conversion by delivering to the holder either cash, common shares, no par value, issued by the Company or a combination thereof. As of March 31, 2012, the conversion rate for each $1,000 principal amount of 7.5% Notes was 135.2005 common shares.

In accordance with accounting for convertible debt instruments that may be settled in cash upon conversion, the Company separately accounted for the liability and equity components to reflect the nonconvertible debt borrowing rate. The Company determined that the equity component of the 7.5% Notes totaled $10.0 million and is included in paid-in-capital on the Company’s condensed consolidated balance sheet as of March 31, 2012. The remaining liability component of $165.1 million, included within convertible senior notes on the Company’s condensed consolidated balance sheet as of March 31, 2012, is comprised of the principal $172.5 million less the unamortized debt discount of $7.4 million. The total debt discount amortization recognized for the three months ended March 31, 2012 was $0.3 million. The debt discount will continue to be amortized at the effective interest rate of 8.6%. For the three months ended March 31, 2012, the total interest expense recognized on the 7.5% Notes was $3.2 million.

During the first quarter of 2012, the Company repurchased $23.1 million par amount of its 7.0% convertible senior notes due July 15, 2012 (the “7.0% Notes”). These transactions resulted in the Company recording a loss of $0.4 million and an immaterial write-off of unamortized debt issuance costs. During 2011, the Company repurchased $45.5 million par amount of its 7.0% Notes, which resulted in the Company recording a loss of $1.7 million and a write-off of $0.1 million of unamortized debt issuance costs. The 7.0% Notes are convertible into the Company’s common shares at a conversion price of $31.00. The conversion rate for each $1,000 principal amount of 7.0% Notes is 32.2581 of the Company’s common shares.

Senior Notes

On March 20, 2012, the Company issued $115.0 million par amount of 7.500% senior notes due March 20, 2042 (“7.500% Senior Notes”), resulting in net proceeds of $111.4 million. The 7.500% Senior Notes bear interest at a rate of 7.500% per year on the principal amount, accruing from March 20, 2012. Interest is payable quarterly in arrears on June 20, September 20, December 20 and March 20 of each year, beginning on June 20, 2012.

On November 15, 2011, the Company issued $258.8 million par amount of 8.375% senior notes due November 15, 2041 (“8.375% Senior Notes”), resulting in net proceeds of $250.7 million. Interest on the 8.375% Senior Notes is paid quarterly in arrears on February 15, May 15, August 15 and November 15 of each year.

25

Note 7. Derivative Financial Instruments

The Company enters into derivative transactions in order to hedge certain risks related to changes in interest rates, foreign currency exchange rates and commodity prices. Additionally, the Company enters into derivative transactions in the course of its portfolio management activities. The counterparties to the Company’s derivative agreements are major financial institutions with which the Company and its affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, the Company is potentially exposed to losses. The counterparties to the Company’s derivative agreements have investment grade ratings and, as a result, the Company does not anticipate that any of the counterparties will fail to fulfill their obligations.

The table below summarizes the aggregate notional amount and estimated net fair value of the derivative instruments as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	As of March 31, 2012						As of December 31, 2011
	Notional			Estimated Fair Value			Notional			Estimated Fair Value
Cash Flow Hedges:
Interest rate swaps	$	508,333		$	(86,052	)	$	508,333		$	(100,718	)
Free-Standing Derivatives:
Commodity swaps	—			11,167			—			7,371
Credit default swaps—protection sold	13,500			116			33,500			(7,177		)
Credit default swaps—protection purchased	(51,476		)	345			—			—
Total rate of return swaps	—			293			—			152
Foreign exchange forward contracts	(238,294		)	(18,147		)	(234,524		)	(12,224		)
Foreign exchange options	130,207			12,155			130,207			13,394
Common stock warrants	—			3,068			—			2,332
Total	$	362,270		$	(77,055	)	$	437,516		$	(96,870	)

Cash Flow Hedges

The Company uses interest rate derivatives consisting of swaps to hedge a portion of the interest rate risk associated with its borrowings under CLO senior secured notes as well as certain of its floating rate junior subordinated notes. The Company designates these financial instruments as cash flow hedges. Changes in value of the interest rate swap are recorded through other comprehensive income, with gains or losses representing hedge ineffectiveness, if any, recognized in earnings during the reporting period.

In September 2011, the Company entered into a $25.0 million notional pay-fixed, receive-variable interest rate swap. The swap has been designated as a cash flow hedge, the objective of which is to eliminate the variability of cash flows in the interest payments of the Company’s floating rate junior subordinated notes due to fluctuations in the indexed rate. The hedged transaction period is through July 2037, which is the stated maturity of the floating rate debt. As of March 31, 2012, the total interest rate swaps used to hedge a portion of the interest rate risk associated with the Company’s floating rate junior subordinated notes was $125.0 million.

The following table shows the net gains recognized in other comprehensive income related to derivatives in cash flow hedging relationships for the three months ended March 31, 2012 and 2011 (amounts in thousands):

	Three months ended March 31, 2012		Three months endedMarch 31, 2011
Gains recognized in other comprehensive income on cash flow hedges	$	14,592	$	8,192

For all hedges where hedge accounting is being applied, effectiveness testing and other procedures to ensure the ongoing validity of the hedges are performed at least quarterly. During the three months ended March 31, 2012 and 2011, the Company recognized an immaterial amount of ineffectiveness in income on the condensed consolidated statements of operations from its cash flow hedges.

Free-Standing Derivatives

Free-standing derivatives are derivatives that the Company has entered into in conjunction with its investment and risk management activities, but for which the Company has not designated the derivative contract as a hedging instrument for accounting purposes. Such derivative contracts may include credit default swaps (“CDS”), foreign exchange contracts and options, interest rate swaps and commodity derivatives. Free-standing derivatives also include investment financing arrangements (total rate of return swaps) whereby the Company receives the sum of all interest, fees and any positive change in fair value amounts from a reference asset with a specified notional amount and pays interest on such notional amount plus any negative change in fair value amounts from such reference asset.

Gains and losses on free-standing derivatives are reported on the condensed consolidated statements of operations in net realized and unrealized gain on derivatives and foreign exchange. Unrealized gains (losses) represent the change in fair value of the derivative instruments and are noncash items.

26

Credit Default Swaps

A CDS is a contract in which the contract buyer pays, in the case of a short position, or receives, in the case of long position, a periodic premium until the contract expires or a credit event occurs. In return for this premium, the contract seller receives a payment from or makes a payment to the buyer if there is a credit default or other specified credit event with respect to the issuer (also known as the referenced entity) of the underlying credit instrument referenced in the CDS. Typical credit events include bankruptcy, dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations of the referenced entity.

As of March 31, 2012 and December 31, 2011, the Company had sold protection with a notional amount of $13.5 million and $33.5 million, respectively. In addition, as of March 31, 2012 and December 31, 2011, the Company had purchased protection with a notional amount of $51.5 million and zero, respectively. The Company sells or purchases protection to replicate fixed income securities and to complement the spot market when cash securities of the referenced entity of a particular maturity are not available or when the derivative alternative is less expensive compared to other purchasing alternatives. In addition, the Company may purchase protection to hedge economic exposure to declines in value of certain credit positions. The Company purchases its protection from banks and broker dealers, other financial institutions and other counterparties.

Commodity Derivatives

In an effort to minimize the effects of the volatility of oil, natural gas and natural gas liquids prices, the Company will from time to time enter into derivative instruments such as swap contracts to hedge its forecasted commodities sales. The Company does not designate these contracts as cash flow hedges and as such, the changes in fair value of these instruments are recorded in current period earnings.

The Company entered into commodity derivative contracts, consisting of oil, natural gas and certain natural gas liquid products receive fixed, pay-floating swaps for certain years through 2016. Realized gains (losses) represent amounts related to the settlement of derivative instruments, and for commodity derivatives, are aligned with the underlying production. During the three months ended March 31, 2012 and 2011, the Company had a $0.9 million and an immaterial amount of commodity derivatives settlements, which are settled monthly.

Note 8. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (amounts in thousands):

	As of March 31, 2012			As of December 31, 2011
Net unrealized gains on available-for-sale securities	$	79,895		$	62,248
Net unrealized losses on cash flow hedges	(83,275		)	(97,867		)
Accumulated other comprehensive loss	$	(3,380	)	$	(35,619	)

Note 9. Commitments & Contingencies

Commitments

As part of its strategy of investing in corporate loans, the Company commits to purchase interests in primary market loan syndications, which obligate the Company to acquire a predetermined interest in such loans at a specified price on a to-be-determined settlement date. Consistent with standard industry practices, once the Company has been informed of the amount of its syndication allocation in a particular loan by the syndication agent, the Company bears the risks and benefits of changes in the fair value of the syndicated loan from that date forward. In addition, the Company also commits to purchase corporate loans in the secondary market that similar to the above, the Company bears the risks and benefits of changes in the fair value from the trade date forward. As of March 31, 2012 and December 31, 2011, the Company had committed to purchase corporate loans with aggregate commitments totaling $284.3 million and $97.2 million, respectively. In addition, the Company participates in certain contingent financing arrangements, whereby the Company is committed to provide funding of up to a specific predetermined amount at the discretion of the borrower or has entered into an agreement to acquire interests in certain assets. As of March 31, 2012 and December 31, 2011, the Company had unfunded financing commitments for corporate loans totaling $7.4 million and $8.1 million, respectively. In addition, as of March 31, 2012 and December 31, 2011, the Company had unfunded financing commitments for other assets, including equity investments, at estimated fair value and working and overriding royalty interests in oil and gas properties, totaling approximately $204.7 million and $40.9 million, respectively. The Company did not have any material losses as of March 31, 2012, nor does it expect material losses related to those assets for which it committed to purchase and fund.

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Note 10. Common Shares, Restricted Shares and Share Options

On May 4, 2007, the Company adopted an amended and restated share incentive plan (the “2007 Share Incentive Plan”) that provides for the grant of qualified incentive common share options that meet the requirements of Section 422 of the Code, non-qualified common share options, share appreciation rights, restricted common shares and other share-based awards. The Compensation Committee of the board of directors administers the plan. Share options and other share-based awards may be granted to the Manager, directors, officers and any key employees of the Manager and to any other individual or entity performing services for the Company.

The exercise price for any share option granted under the 2007 Share Incentive Plan may not be less than 100% of the fair market value of the common shares at the time the common share option is granted. Each option to acquire a common share must terminate no more than ten years from the date it is granted. As of March 31, 2012, the 2007 Share Incentive Plan authorizes a total of 8,714,625 shares that may be used to satisfy awards under the 2007 Share Incentive Plan. On January 17, 2012, the Compensation Committee of the board of directors granted the Manager 258,303 restricted common shares subject to graded vesting over three years with the final vesting date of March 1, 2015.

The following table summarizes restricted common share transactions:

	Manager		Directors	Total
Unvested shares as of January 1, 2012	240,845		145,676	386,521
Issued	258,303		—	258,303
Vested	(60,211	)	—	(60,211	)
Forfeited	—		—	—
Unvested shares as of March 31, 2012	438,937		145,676	584,613

The Company is required to value any unvested restricted common shares granted to the Manager at the current market price. The Company valued the unvested restricted common shares granted to the Manager at $9.21 and $9.79 per share at March 31, 2012 and 2011, respectively. There were $3.9 million and $2.9 million of total unrecognized compensation costs related to unvested restricted common shares granted as of March 31, 2012 and 2011, respectively. These costs are expected to be recognized through 2015. The following table summarizes common share option transactions:

	Number of Options	Weighted Average Exercise Price
Outstanding as of January 1, 2012	1,932,279	$	20.00
Granted	—	—
Exercised	—	—
Forfeited	—	—
Outstanding as of March 31, 2012	1,932,279	$	20.00

As of March 31, 2012 and 2011, 1,932,279 common share options were exercisable. As of March 31, 2012, the common share options were fully vested and expire in August 2014.

For the three months ended March 31, 2012 and 2011, the components of share-based compensation expense are as follows (amounts in thousands):

	For the three months ended March 31, 2012		For the three months ended March 31, 2011
Restricted shares granted to Manager	$	383	$	1,634
Restricted shares granted to certain directors	231		199
Total share-based compensation expense	$	614	$	1,833

Note 11. Management Agreement and Related Party Transactions

The Manager manages the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors. The Management Agreement expires on December 31 of each year, but is automatically renewed for a one-year term each December 31 unless terminated upon the affirmative vote of at least two-thirds of the Company’s independent directors, or by a vote of the holders of a majority of the Company’s outstanding common shares, based upon (1) unsatisfactory performance by the Manager

28

that is materially detrimental to the Company or (2) a determination that the management fee payable by the Manager is not fair, subject to the Manager’s right to prevent such a termination under this clause (2) by accepting a mutually acceptable reduction of management fees. The Manager must be provided 180 days prior notice of any such termination and will be paid a termination fee equal to four times the sum of the average annual base management fee and the average annual incentive fee for the two 12-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

The Management Agreement contains certain provisions requiring the Company to indemnify the Manager with respect to all losses or damages arising from acts not constituting bad faith, willful misconduct, or gross negligence. The Company has evaluated the impact of these guarantees on its condensed consolidated financial statements and determined that they are not material.

Base Management Fees and Manager Share-Based Compensation

For the three months ended March 31, 2012, the Company incurred $7.0 million in base management fees. As of March 31, 2012, the Company had $2.4 million base management fee payable to the Manager. In addition, the Company recognized share-based compensation expense related to restricted common shares granted to the Manager of $0.4 million for the three months ended March 31, 2012 (see Note 10). For the three months ended March 31, 2011, the Company incurred $6.2 million in base management fees. In addition, the Company recognized share-based compensation expense related to restricted common shares granted to the Manager of $1.6 million for the three months ended March 31, 2011 (see Note 10).

Base management fees incurred and share-based compensation expense relating to common share options and restricted common shares granted to the Manager are included in related party management compensation on the condensed consolidated statements of  operations. Expenses incurred by the Manager and reimbursed by the Company are reflected in the respective condensed consolidated statements of operations, non-investment expense category based on the nature of the expense.

The Manager is waiving base management fees related to the $230.4 million common share offering and $270.0 million common share rights offering that occurred during the third quarter of 2007 until such time as the Company’s common share closing price on the New York Stock Exchange (“NYSE”) is $20.00 or more for five consecutive trading days. Accordingly, the Manager permanently waived approximately $2.2 million of base management fees during each of the three months ended March 31, 2012 and 2011.

Incentive Fees

During the three months ended March 31, 2012, the Manager earned $9.7 million of incentive fees. As of March 31, 2012, the Company had $9.7 million incentive fee payable to the Manager. During the three months ended March 31, 2011, the Manager earned $12.0 million of incentive fees. Incentive fees are included in related party management compensation on the Company’s condensed consolidated statement of operations.

CLO Management Fees

An affiliate of the Manager entered into separate management agreements with the respective investment vehicles for CLO 2005-1, CLO 2005-2, CLO 2006-1, CLO 2007-1, CLO 2007-A and CLO 2011-1 and is entitled to receive fees for the services performed as collateral manager for all of these CLOs, except for CLO 2011-1. The collateral manager has the option to waive the fees it earns for providing management services for the CLO.

During the three months ended March 31, 2012 and 2011, the collateral manager waived all management fees for all CLOs, except for CLO 2005-1, and waived aggregate CLO management fees of $8.3 million and $8.8 million, respectively. For the three months ended March 31, 2012 and 2011, the Company recorded an expense for CLO management fees totaling $1.1 million and $1.3 million, respectively.

Reimbursable General and Administrative Expenses

Certain general and administrative expenses are incurred by the Company’s Manager on its behalf that are reimbursable to the Manager pursuant to the Management Agreement. During the three months ended March 31 2012 and 2011, the Company incurred reimbursable general and administrative expenses to its Manager of $2.0 million and $1.7 million, respectively.

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Affiliated Investments

The Company has invested in corporate loans, debt securities, and other investments of entities that are affiliates of KKR. As of March 31, 2012, the aggregate par amount of these affiliated investments totaled $2.3 billion, or approximately 30% of the total investment portfolio, and consisted of 30 issuers. The total $2.3 billion in affiliated investments was comprised of $2.1 billion of corporate loans, $146.6 million of corporate debt securities and $68.9 million of equity investments, at estimated fair value. As of December 31, 2011, the aggregate par amount of these affiliated investments totaled $2.4 billion, or approximately 29% of the total investment portfolio, and consisted of 28 issuers. The total $2.4 billion in affiliated investments was comprised of $2.2 billion of corporate loans, $168.1 million of corporate debt securities and $62.0 million of equity investments, at estimated fair value.

Note 12. Fair Value of Financial Instruments

Fair Value of Financial Instruments

The fair value of certain instruments including securities available-for-sale, corporate loans, derivatives, and loan commitments is based on quoted market prices or estimates provided by independent pricing sources. The fair value of cash and cash equivalents, interest receivable, and interest payable approximates cost due to the short-term nature of these instruments.

The table below discloses the carrying value and the estimated fair value of the Company’s financial instruments, as well as the respective hierarchy classifications, as of March 31, 2012 (amounts in thousands):

	As of March 31, 2012				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash, restricted cash, and cash equivalents	$	1,350,796	$	1,350,796	$	—	$	1,350,796	$	—
Securities available-for-sale	752,320		752,320		6,483		674,331		71,506
Other securities, at estimated fair value	26,076		26,076		—		23,355		2,721
Residential mortgage-backed securities	87,363		87,363		—		—		87,363
Corporate loans, net of allowance for loan losses of $235,807 as of March 31, 2012	5,665,306		5,723,022		—		5,143,183		579,839
Corporate loans held for sale	297,708		361,764		—		323,774		37,990
Corporate loans, at estimated fair value	9,929		9,929		—		—		9,929
Equity investments, at estimated fair value	203,642		203,642		9,806		34,335		159,501
Interest and principal receivable	38,336		38,336		—		38,336		—
Derivative assets	31,109		31,109		1,517		15,332		14,260
Private equity investments, at cost	780		915		—		—		915
Financial Liabilities:
Collateralized loan obligation secured debt	$	5,496,488	$	5,217,556	$	—	$	—	$	5,217,556
Collateralized loan obligation junior secured notes to affiliates	347,855		292,723		—		—		292,723
Credit facilities	66,800		66,800		—		—		66,800
Convertible senior notes	277,091		357,255		—		357,255		—
Senior notes	362,109		389,310		389,310		—		—
Junior subordinated notes	283,517		256,937		—		—		256,937
Accounts payable, accrued expenses and other liabilities	34,080		34,080		—		34,080		—
Accrued interest payable	20,659		20,659		—		20,659		—
Accrued interest payable to affiliates	7,102		7,102		—		7,102		—
Related party payable	16,827		16,827		—		16,827		—
Securities sold, not yet purchased	1,245		1,245		1,245		—		—
Derivative liabilities	108,164		108,164		—		107,902		262

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The table below discloses the carrying value and the estimated fair value of the Company’s financial instruments as of December 31, 2011 (amounts in thousands):

	As of December 31, 2011
	Carrying Amount		Estimated Fair Value
Financial Assets:
Cash, restricted cash, and cash equivalents	$	791,774	$	791,774
Securities available-for-sale	816,453		816,453
Other securities, at estimated fair value	19,671		19,671
Residential mortgage-backed securities	86,479		86,479
Corporate loans, net of allowance for loan losses of $191,407 as of December 31, 2011	6,122,891		5,999,771
Corporate loans held for sale	317,332		359,463
Corporate loans, at estimated fair value	3,176		3,176
Equity investments, at estimated fair value	189,845		189,845
Interest and principal receivable	62,124		62,124
Derivative assets	28,463		28,463
Private equity investments, at cost	780		780
Financial Liabilities:
Collateralized loan obligation secured debt	$	5,540,037	$	5,200,534
Collateralized loan obligation junior secured notes to affiliates	365,848		283,914
Credit facilities	38,300		38,300
Convertible senior notes	299,830		368,502
Senior notes	250,676		261,834
Junior subordinated notes	283,517		262,962
Accounts payable, accrued expenses and other liabilities	23,424		23,424
Accrued interest payable	25,536		25,536
Accrued interest payable to affiliates	6,561		6,561
Related party payable	11,078		11,078
Securities sold, not yet purchased	1,256		1,256
Derivative liabilities	125,333		125,333

Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Balance as of March 31,2012
Assets:
Securities available-for-sale:
Corporate debt securities	$	—		$	674,331		$	71,506		$	745,837
Common and preferred stock	6,483			—			—			6,483
Total securities available-for-sale	6,483			674,331			71,506			752,320
Other securities, at estimated fair value	—			23,355			2,721			26,076
Residential mortgage-backed securities	—			—			87,363			87,363
Total securities	6,483			697,686			161,590			865,759
Corporate loans, at estimated fair value	—			—			9,929			9,929
Equity investments, at estimated fair value	9,806			34,335			159,501			203,642
Total rate of return swaps	—			—			293			293
Foreign exchange options	—			—			12,416			12,416
Commodity swaps	—			11,804			—			11,804
Common stock warrants	1,517			—			1,551			3,068
Foreign exchange forward contracts	—			1,731			—			1,731
Credit default swaps—protection purchased	—			1,681			—			1,681
Credit default swaps—protection sold	—			116			—			116
Other assets	—			—			676			676
Total	$	17,806		$	747,353		$	345,956		$	1,111,115
Liabilities:
Securities sold, not yet purchased	$	(1,245	)	$	—		$	—		$	(1,245	)
Cash flow interest rate swaps	—			(86,052		)	—			(86,052		)
Foreign exchange forward contracts	—			(19,878		)	—			(19,878		)
Credit default swaps—protection purchased	—			(1,335		)	—			(1,335		)
Commodity swaps	—			(637		)	—			(637		)
Foreign exchange options	—			—			(262		)	(262		)
	$	(1,245	)	$	(107,902	)	$	(262	)	$	(109,409	)

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The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of March 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands). There were no liabilities measured at fair value on a non-recurring basis:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of March 31, 2012
Corporate loans held for sale(1)	$	—	$	83,715	$	26,825	$	110,540

(1)As of March 31, 2012, total loans held for sale had a carrying value of $297.7 million of which $110.5 million was carried at estimated fair value and the remaining $187.2 million carried at amortized cost. Of the $110.5 million carried at estimated fair value, $83.7 million was classified as Level 2 given that the assets were valued using quoted prices and other observable inputs in an active market. The remaining $26.8 million was classified as Level 3 given that the Company applied unobservable inputs based on the best available information to determine the estimated fair value.

The following table presents information about the Company’s assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2011
Assets:
Securities available-for-sale:
Corporate debt securities	$	—		$	736,010		$	67,233	$	803,243
Common and preferred stock	11,902			1,308			—		13,210
Total securities available-for-sale	11,902			737,318			67,233		816,453
Other securities, at estimated fair value	—			16,893			2,778		19,671
Residential mortgage-backed securities	—			—			86,479		86,479
Total securities	11,902			754,211			156,490		922,603
Corporate loans, at estimated fair value	—			3,176			—		3,176
Equity investments, at estimated fair value	10,498			28,385			150,962		189,845
Total rate of return swaps	—			—			152		152
Foreign exchange options, net	—			—			13,394		13,394
Commodity swaps, net	—			7,371			—		7,371
Common stock warrants	1,066			—			1,266		2,332
Other assets	—			—			567		567
Total	$	23,466		$	793,143		$	322,831	$	1,139,440
Liabilities:
Securities sold, not yet purchased	$	(1,256	)	$	—		$	—	$	(1,256	)
Cash flow interest rate swaps	—			(100,718		)	—		(100,718		)
Foreign exchange forward contracts, net	—			(12,224		)	—		(12,224		)
Credit default swaps—protection sold, net	—			(7,177		)	—		(7,177		)
	$	(1,256	)	$	(120,119	)	$	—	$	(121,375	)

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The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands). There were no liabilities measured at fair value on a non-recurring basis:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2011
Loans held for sale(1)	$	—	$	159,120	$	6,698	$	165,818
Private equity investments(2)	—		—		780		780
Total	$	—	$	159,120	$	7,478	$	166,598

(1)As of December 31, 2011, total loans held for sale had a carrying value of $317.3 million of which $165.8 million was carried at estimated fair value and the remaining $151.5 million carried at amortized cost. Of the $165.8 million carried at estimated fair value, $159.1 million was classified as Level 2 given that the assets were valued using quoted prices and other observable inputs in an active market. The remaining $6.7 million was classified as Level 3 given that the Company applied unobservable inputs based on the best available information to determine the estimated fair value.

(2)Represents private equity investments accounted for under the cost method that were classified as Level 3 when the assets were impaired and measured at estimated fair value using unobservable inputs.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the three months ended March 31, 2012 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value			Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value		Total Rate of Return Swaps		Common Stock Warrants		Foreign Exchange Options, Net			Other Assets
Beginning balance as of January 1, 2012	$	67,233		$	2,778		$	86,479		$	—	$	150,962	$	152	$	1,266	$	13,394		$	567
Total gains or losses (for the period):
Included in earnings(1)	550			(57		)	2,436			1,314		2,388		141		285		(1,240		)	109
Included in other comprehensive income	4,051			—			—			—		—		—		—		—			—
Transfers into Level 3(2)	—			—			—			—		—		—		—		—			—
Transfers out of Level 3(2)	—			—			—			—		—		—		—		—			—
Purchases	—			—			—			8,615		6,151		—		—		—			—
Sales	—			—			—			—		—		—		—		—			—
Settlements	(328		)	—			(1,552		)	—		—		—		—		—
Ending balance as of March 31, 2012	$	71,506		$	2,721		$	87,363		$	9,929	$	159,501	$	293	$	1,551	$	12,154		$	676
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	550		$	(57	)	$	7,798		$	1,314	$	2,388	$	141	$	285	$	(1,240	)	$	109

(1)Amounts are included in net realized and unrealized gain on investments, net realized and unrealized gain on derivatives and foreign exchange or net realized and unrealized gain (loss) on residential mortgage-backed securities, at estimated fair value in the condensed consolidated statements of operations.

(2)There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

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The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivatives, that are measured at fair value and categorized within Level 3 as of March 31, 2012 (dollar amounts in thousands):

	Balance as of March 31, 2012			Valuation Techniques (1)	Unobservable Inputs (2)	Range (Weighted Average) (3)	Impact to Valuation from an Increase in Input (4)
Assets:
Securities available-for-sale: Corporate debt securities	$	71,506		Market comparables	Yield Discount margin Total leverage Illiquidity discount	8%-25% (15%) 600bps-2400bps (1400bps) 1x-6x (3x) 2%-7% (4%)	Decrease Decrease Decrease Decrease
				Discounted cash flows	Weighted average cost of capital	12% (12%)	Decrease
				Broker quotes	Offered quotes	60-103 (84)	Increase
Other securities, at estimated fair value	$	2,721		Market comparables	Yield	11% (11%)	Decrease
Residential mortgage-backed securities	$	87,363		Discounted cash flows	Probability of default Loss severity Constant prepayment rate	0%-32% (11%) 24%-80% (33%) 0%-35% (13%)	Decrease Decrease (5)
Corporate loans, at estimated fair value	$	9,929		Market comparables	Yield Discount margin Illiquidity discount	39% (39%) 3772bps (3772bps) 20% (20%)	Decrease Decrease Decrease
Equity investments, at estimated fair value	$	159,501		Market comparables	LTM EBITDA multiple Forward EBITDA multiple Control premium	7x-14x (10x) 6x-12x (9x) 25% (25%)	Increase Increase Increase
				Discounted cash flows	Weighted average cost of capital Exit multiple LTM EBITDA	8%-15% (11%) 6x-11x (8x)	Decrease Increase
Total rate of return swaps (6)	$	293		—	—	—	—
Common stock warrants	$	1,551		Market comparables	LTM EBITDA multiple Forward EBITDA multiple	6.2x (6.2x) 6.1x (6.1x)	Increase Increase
				Discounted cash flows	Weighted average cost of capital Exit multiple LTM EBITDA	11% (11%) 6.1x (6.1x)	Decrease Increase
Foreign exchange options	$	12,416		Option pricing model	Forward and spot rates	0.02-1.42 (1.36)	(7)
Other assets	$	676		Broker quotes	Offered quotes	0.09-1.80 (0.76)	Increase
Liabilities:
Foreign exchange options	$	(262	)	Option pricing model	Forward and spot rates	0.02 (0.02)	(7)

(1)  For the assets that have more than one valuation technique, the Company may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. Broker quotes obtained for valuation purposes are reviewed by the Company through other valuation techniques. Equity investments, at estimated fair value are assigned a minimum 5% illiquidity discount, with the exception of certain investments related to natural resources.

(2)  The significant unobservable inputs used in the fair value measurement of the Company’s assets and liabilities may include the last twelve months (“LTM”) earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a variety of factors including economic, industry and market trends and developments; market valuations of comparable companies; and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement.

(3) Weighted average amounts are based on the estimated fair values.

(4) Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

(5) Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6) Note that this amount represents the accrued interest on the unsettled unwind of the total rate of return swaps.

(7) The directional change from an increase in forward and spot rates varies and is dependent on the specific option.

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The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized level 3 inputs to determine fair value, for the three months ended March 31, 2011 (amounts in thousands):

	Securities Available- For-Sale			Residential Mortgage- Backed Securities			Equity Investments, at Estimated Fair Value		Total Rate of Return Swaps		Common Stock Warrants		Foreign Exchange Options, Net		Other Assets
Beginning balance as of January 1, 2011	$	83,097		$	93,929		$	84,932	$	104	$	3,453	$	14,791	$	—
Total gains or losses (realized and unrealized):
Included in earnings(1)	239			(1,660		)	24,462		31		718		1,682		—
Included in other comprehensive income	3,450			—			—		—		—		—		—
Transfers into Level 3(2)	12,986			—			—		—		—		—		—
Purchases	1,816			—			17,424		—		—		—		—
Sales	(1,665		)	—			—		—		—		—		—
Settlements	6,509			(1,900		)	9,723		—		—		—		750
Ending balance as of March 31, 2011	$	106,432		$	90,369		$	136,541	$	135	$	4,171	$	16,473	$	750
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date(1)	$	—		$	5,895		$	24,462	$	—	$	718	$	1,682	$	—

(1)Amounts are included in net realized and unrealized gain on investments, net realized and unrealized gain on derivatives and foreign exchange or net realized and unrealized gain (loss) on residential mortgage-backed securities, at estimated fair value in the condensed consolidated statements of operations.

(2)Certain securities available-for-sale and equity investments, at estimated fair value, were transferred into Level 3 reflecting reduced transparency of prices for these financial instruments as a result of less trading activity. There were no significant transfers out of Level 3 into Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

Note 13. Segment Reporting

Operating segments are defined as components of a company in which separate financial information is available and reviewed by the chief operating decision maker or group in determining how to allocate resources and assessing performance. The Company operates its business through multiple reportable business segments, which it has determined to be credit (“Credit”) and all other segments (“Other”). The Company’s segments are differentiated primarily by their investment focuses. The Credit segment includes primarily below investment grade corporate debt comprised of senior secured and unsecured loans, mezzanine loans, high yield bonds, and distressed and stressed debt securities. The Other segments include all other portfolio holdings, including oil and natural gas working interests and overriding royalty interests.

Prior to 2011, the Company operated under a single business segment of Credit. However, during 2011, the Company began purchasing additional working interests and overriding royalty interests in oil and natural gas properties. As of December 31, 2011, the Company determined that it met certain segment reporting requirements and accordingly, began disclosing information by segment based on its acquisition of additional natural resources assets, combined with its belief that other areas of investment focus including natural resources, while currently not material, may become a significant part of its business. The segments currently reported are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by the Company.

The Company evaluates the performance of its segments based on several components including total investment income, net investment income, other income (loss) and net income (loss). Net investment income is the difference between income earned on assets (or total investment income) and the cost of liabilities to fund those assets, as well as the related provision for loan losses, if applicable. Net income (loss) includes (i) net investment income, (ii) other income (loss), which is comprised primarily of unrealized and realized gains and losses on investments and derivatives, and (iii) non-investment expenses. Certain corporate assets and expenses that are not directly related to the individual segments, including base management fees and professional services are allocated to

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individual segments based on the carrying value of the assets within those segments. Certain other corporate assets and expenses, including prepaid insurance, incentive fees, insurance expenses, directors’ expenses and share-based compensation expense are not allocated to individual segments in the Company’s assessment of segment performance. Collectively, these items are included as reconciling items between reported segment amounts and consolidated totals.

The following table shows data of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements for the three months ended March 31, 2012 and 2011 (amounts in thousands):

For the three months	Credit				Other					Reconciling Items						Consolidated Company
ended March 31,	2012		2011		2012		2011			2012			2011			2012		2011
Total investment income	$	126,881	$	132,424	$	11,053	$	2,906		$	—		$	—		$	137,934	$	135,330
Net investment income	$	27,280	$	76,707	$	10,582	$	2,745		$	—		$	—		$	37,862	$	79,452
Other income (loss)	$	74,197	$	46,720	$	4,734	$	(284	)	$	—		$	—		$	78,931	$	46,436
Net income (loss)	$	92,758	$	112,282	$	6,497	$	(142	)	$	(11,207	)	$	(18,373	)	$	88,048	$	93,767

The following table shows total assets of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	Credit				Other(1)				Reconciling Items				Consolidated Company
As of	March 31,2012		December 31, 2011		March 31,2012		December 31, 2011		March 31, 2012		December 31, 2011		March 31,2012		December  31, 2011
Total assets	$	8,524,160	$	8,487,702	$	247,442	$	158,639	$	588	$	887	$	8,772,190	$	8,647,228

(1)Consists primarily of natural resources assets, which are included in other assets on our condensed consolidated balance sheets.

Note 14. Subsequent Events

On April 24, 2012, the Company’s board of directors declared a cash distribution for the quarter ended March 31, 2012 on the Company’s common shares of $0.18 per share. The distribution is payable on May 22, 2012 to common shareholders of record as of the close of business on May 8, 2012.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except where otherwise expressly stated or the context suggests otherwise, the terms “we,” “us” and “our” refer to KKR Financial Holdings LLC and its subsidiaries.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Certain information contained in this Quarterly Report on Form 10-Q constitutes “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our current expectations, estimates and projections. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. The words “believe,” “anticipate,” “intend,” “aim,” “expect,” “strive,” “plan,” “estimate,” and “project,” and similar words identify forward-looking statements. Such statements are not guarantees of future performance, events or results and involve potential risks and uncertainties. Accordingly, actual results and the timing of certain events could differ materially from those addressed in forward-looking statements due to a number of factors including, but not limited to, changes in interest rates and market values, financing and capital availability, changes in prepayment rates, general economic and political conditions and events, changes in market conditions, particularly in the global fixed income, credit and equity markets, the impact of current, pending and future legislation, regulation and legal actions, and other factors not presently identified. Other factors that may impact our actual results are discussed under “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K filed with the Securities Exchange Commission, or the SEC, on February 28, 2012. We do not undertake, and specifically disclaim, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except for as required by federal securities laws.

Executive Overview

We are a specialty finance company with expertise in a range of asset classes. Our core business strategy is to leverage the proprietary resources of our manager with the objective of generating both current income and capital appreciation by deploying capital to our strategies, which include bank loans and high yield securities, natural resources, special situations, mezzanine, commercial real estate and private equity. Our holdings across these strategies primarily consist of below investment grade syndicated corporate loans, also known as leveraged loans, high yield debt securities, private equity and working and royalty interests in oil and gas properties. The corporate loans that we hold are purchased via assignment or participation in the primary or secondary market.

The majority of our holdings consist of corporate loans and high yield debt securities held in collateralized loan obligation (“CLO”) transactions that are structured as on-balance sheet securitizations and are used as long term financing for our investments in corporate debt. The senior secured debt issued by the CLO transactions is primarily owned by unaffiliated third party investors and we own the majority of the subordinated notes in the CLO transactions. Our CLO transactions consist of six CLO transactions, KKR Financial CLO 2005-1, Ltd. (“CLO 2005-1”), KKR Financial CLO 2005-2, Ltd. (“CLO 2005-2”), KKR Financial CLO 2006-1, Ltd. (“CLO 2006-1”), KKR Financial CLO 2007-1, Ltd. (“CLO 2007-1”), KKR Financial CLO 2007-A, Ltd. (“CLO 2007-A”), and KKR Financial CLO 2011-1, Ltd. (“CLO 2011-1”) (collectively the “Cash Flow CLOs”). We execute our core business strategy through our majority-owned subsidiaries, including CLOs.

We are a Delaware limited liability company and were organized on January 17, 2007. We are the successor to KKR Financial Corp., a Maryland corporation. Our common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the symbol “KFN”. We intend to continue to operate so as to qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation.

We are managed by KKR Financial Advisors LLC (our “Manager”), a wholly-owned subsidiary of KKR Asset Management LLC (“KAM”), pursuant to a management agreement (the “Management Agreement”). KAM is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P. (“KKR”).

Business Environment

During the first quarter of 2012, we witnessed continued spread tightening in the high yield debt markets as evidenced through price appreciation in the leveraged loan and high yield bond indices. Specifically, the S&P/LSTA Loan Index returned 3.8% for the first quarter of 2012 (as compared to 2.4% for the first quarter of 2011) and the Merrill Lynch High Yield Master II index returned 5.1% for the first quarter of 2012 (as compared to 3.9% for the first quarter of 2011).

Interest rates in the U.S. remained low during the first quarter of 2012 with the three-month London interbank offered rate (“LIBOR”) rate at 0.47% as of March 31, 2012 compared to 0.30% as of March 31, 2011 and 0.58% as of December 31, 2011. As a result of the low interest rates, we saw a continual flow of assets offering an income premium, or LIBOR floor. As of March 31, 2012, 33.5% of our floating corporate debt portfolio had LIBOR floors compared to 25.0% as of March 31, 2011 and 32.2% as of December 31, 2011.

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Summary of Results

Our net income for the three months ended March 31, 2012 totaled $88.0 million (or $0.48 per diluted common share), as compared to net income of $93.8 million (or $0.51 per diluted common share), for the three months ended March 31, 2011. Net income for the three months ended March 31, 2012 consisted of net investment income before a provision for loan losses of $84.4 million, a provision for loan losses of $46.5 million, other income totaling $78.9 million and non-investment expenses of $32.8 million. Comparatively, net income for the three months ended March 31, 2011 consisted of net investment income before a provision for loan losses of $91.1 million, a provision for loan losses of $11.7 million, other income totaling $46.4 million and non-investment expenses of $30.8 million.

Net investment income is comprised of total investment income, net of interest expense and provision for loan losses. Total investment income consists primarily of interest income and discount accretion from our investment portfolio, as well as other investment income from revenue earned on our working and royalty interests in oil and gas properties. Net investment income before a provision for loan losses decreased $6.8 million from the three months ended March 31, 2011 to 2012 primarily due to $5.7 million of interest expense recorded in 2012 related to our senior note offerings from November 2011 and March 2012.

For the three months ended March 31, 2012, we recorded a provision for loan losses of $46.5 million as compared to $11.7 million for the same period in 2011. Reflecting the $46.5 million provision we recorded during the first quarter of 2012, our allowance for loan losses totaled $235.8 million as of March 31, 2012. Of this amount, $34.5 million reflected our allocated reserve and $201.3 million reflected our unallocated reserve. The majority of our $46.5 million provision related to an increase in our unallocated reserve based on a review of our unimpaired, held for investment loan portfolio, with particular sensitivity to the loans that we have designated as high risk within our internally assigned risk grades, especially Texas Competitive Electric Holdings Company LLC. Of the three internally assigned risk grades, as of March 31, 2012, we had loans issued from ten issuers with an aggregate par value and amortized cost amount of $1.1 billion that we classified as high risk. Approximately 88% of the amortized cost balance of loans classified as high risk consisted of the following holdings: i) $311.4 million amortized cost amount of loans issued by Modular Space Corporation; ii) $309.2 million amortized cost amount of loans issued by Texas Competitive Electric Holdings Company LLC; iii) $205.3 million amortized cost amount of loans issued by First Data Corporation; iv) $69.2 million amortized cost amount of loans issued by Realogy Corporation; and v) $60.7 million amortized cost amount of loans issued by Caesars Entertainment Operating Company.

Other income increased $32.5 million primarily as a result of realized gains on sales and paydowns of certain investments.

The components of net income for the three month periods ended March 31, 2012 and 2011 are detailed further below under “Results of Operations.”

Book value per share increased $0.40 to $9.81 as of March 31, 2012 from $9.41 as of December 31, 2011. The increase was primarily attributable to earnings for the year of $0.48 per diluted common share and an increase in our accumulated other comprehensive income, a component of shareholders’ equity of $0.18 per common share, partially offset by our cash distributions to shareholders of $0.26 per common share. The $0.18 per common share change in accumulated other comprehensive income was primarily as a result of an increase in value of certain securities available-for-sale as well as our interest rate swaps designated as cash flow hedges.

Senior Notes Offering

On March 20, 2012, we issued $115.0 million par amount of 7.500% senior notes (“7.500% Senior Notes”) due March 20, 2042, resulting in net proceeds of $111.4 million. The 7.500% Senior Notes bear interest at a rate of 7.500% per year on the principal amount, accruing from March 20, 2012. Interest is payable quarterly in arrears on June 20, September 20, December 20 and March 20 of each year, beginning on June 20, 2012. The total net proceeds from this offering will be used for general corporate purposes.

Cash Distributions to Shareholders

On April 24, 2012, our board of directors declared a cash distribution for the quarter ended March 31, 2012 on our common shares of $0.18 per share. The distribution is payable on May 22, 2012 to common shareholders of record as of the close of business on May 8, 2012.

The amount and timing of our distributions to our common shareholders, including quarterly distributions or any special distributions, is determined by our board of directors and is based upon a review of various factors including current market conditions, existing restrictions under borrowing agreements, the amount of ordinary taxable income or loss earned by us, gains or losses recognized by us on the disposition of assets and our liquidity needs. For this purpose, we will generally determine gains or losses based upon the price we paid for those assets. We note, however, because of the tax rules applicable to partnerships, the gains or losses recognized by a shareholder on the sale of assets held by us may be higher or lower depending upon the purchase price the shareholder paid for our shares. Shareholders may have taxable income or tax liability attributable to our shares for a taxable year that is greater than our cash distributions for such taxable year. See “Non-Cash ‘Phantom’ Taxable Income” for further discussion about taxable income allocable to holders of our common shares and “Sources of Funds—Credit Facilities” for further discussion about the restrictions on the amount of cash distributions we can pay.

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Consolidation

CLO 2005-1, CLO 2005-2, CLO 2006-1, CLO 2007-1, CLO 2007-A and CLO 2011-1 are all variable interest entity (“VIEs”) that we consolidate as we have determined we have the power to direct the activities that most significantly impact these entities’ economic performance and we have both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities.

As our condensed consolidated financial statements in this Quarterly Report on Form 10-Q are presented to reflect the consolidation of the Cash Flow CLOs we hold investments in, the information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the Cash Flow CLOs on a consolidated basis, which is consistent with the disclosures in our condensed consolidated financial statements.

Non-Cash “Phantom” Taxable Income

We intend to continue to operate so as to qualify, for United States federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. Holders of our shares are subject to United States federal income taxation and generally other taxes, such as state, local and foreign income taxes, on their allocable share of our taxable income, regardless of whether or when they receive cash distributions. In addition, certain of our investments, including investments in foreign corporate subsidiaries, CLO issuers (which are treated as partnerships or disregarded entities for United States federal income tax purposes) and debt securities, may produce taxable income without corresponding distributions of cash to us or produce taxable income prior to or following the receipt of cash relating to such income. In addition, we have recognized and may recognize in the future cancellation of indebtedness income upon the retirement of our debt at a discount. Consequently, in some taxable years, holders of our shares may recognize taxable income in excess of our cash distributions. Furthermore, even if we did not pay cash distributions with respect to a taxable year, holders of our shares may still have a tax liability attributable to their allocation of our taxable income from us during such year.

Investment Portfolio

Overview

Our core business strategy is to leverage the proprietary resources of our Manager with the objective of generating both current income and capital appreciation by deploying capital to different strategies that reflect the opportunity set that our Manager specializes in. These strategies and a summary of each are as follows:

·Bank loans and high yield: We deploy capital to this strategy primarily through our CLO subsidiaries. This strategy primarily consists of senior secured corporate loans and debt securities, but also includes second lien, unsecured and subordinated corporate loans and debt securities.

·Natural resources: Our natural resources strategy primarily consists of deploying capital to oil and gas opportunities by acquiring working interests in conventional producing properties, acquiring royalty interests in both producing properties and unconventional resource developments (i.e. emerging shale plays) and deploying capital to private equity and joint venture opportunities focused on the oil and gas sector.

·Special situations: Special situations opportunities may take the form of debt and/or equity and generally consist of deploying capital to deeply discounted secondary market opportunities, debtor-in-possession and exit facilities, rescue financing transactions and other distressed opportunities.

·Mezzanine: Mezzanine opportunities generally represent the private debt instruments located in the middle of a company’s capital structure, senior to common or preferred equity but subordinate to senior secured debt. Generally, mezzanine securities take the form of privately negotiated subordinated debt, and, to a lesser extent, senior notes or preferred stock, with some form of equity participation either through common or preferred stock, options or warrants.

·Commercial real estate:  Our commercial real estate strategy consists of deploying capital to domestic and foreign opportunities through debt or equity interests in commercial real estate properties and fixed income instruments.

·Private equity: Our private equity strategy consists of deploying capital to private equity opportunities primarily on a side-by-side basis with KKR’s private equity funds.

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The majority of our investments are held through CLO transactions that are managed by an affiliate of our Manager and for which we own the majority, and in some cases all, of the residual economic interests in the transaction through the subordinated notes in the transaction. As of March 31, 2012, our Cash Flow CLOs, which were structured as financing vehicles engaged in holding primarily corporate debt investments, held $6.9 billion par amount or $6.5 billion estimated fair value of corporate debt investments. Our corporate debt investments held through our Cash Flow CLOs consist of the following as of March 31, 2012:

·Corporate loans: Corporate loans consist of bank loans that are held through our CLOs with an aggregate par value of $6.2 billion and estimated fair value of $5.8 billion. Corporate loans held through our CLO transactions have a weighted average coupon of 4.7%, of which 99.9% of the corporate loans are floating rate with a weighted average coupon spread to LIBOR of 3.9%. The remaining 0.1% are fixed rate with a weighted average coupon of 11.5%.

·Corporate debt securities: Corporate debt securities consist of high yield bonds held through our CLOs with an aggregate par amount of $660.6 million and estimated fair value of $663.5 million. Corporate debt securities held through our CLO transactions have a weighted average coupon of 8.8%, of which 83.9% of the corporate debt securities are fixed rate with a weighted average coupon of 9.7%. The remaining 16.1% are floating rate with a weighted average coupon spread to LIBOR of 3.6%.

Weighted average coupon and coupon spreads are calculated based on par values. Fixed and floating percentages are also calculated based on par values.

In addition to the corporate debt portfolio, we hold two pay-fixed, receive-variable interest rate swaps through certain of our CLOs. These interest rate derivatives consist of swaps to hedge a portion of the interest rate risk associated with our borrowings under the CLO senior secured notes. As of March 31, 2012, the contractual notional balance of our amortizing interest rate swaps was $383.3 million.

These Cash Flow CLOs had aggregate secured debt outstanding totaling $5.5 billion held by unaffiliated third parties and aggregate junior secured notes outstanding totaling $347.9 million held by an affiliate of our Manager. In CLO transactions, subordinated notes effectively represent the equity in such transactions as they have the first risk of loss and conversely, the residual value upside of the transactions. As we hold the majority or all of the subordinated notes in each of the Cash Flow CLOs, we consolidate all of the Cash Flow CLOs and reflect all income and losses related to the assets in these Cash Flow CLOs on our condensed consolidated statement of operations even though a minority interest in two of our CLO transactions is not held by us.

The indentures governing the CLO transactions stipulate the reinvestment period during which the collateral manager, an affiliate of our Manager, can generally sell or buy assets at its discretion and can reinvest principal proceeds into new assets. CLO 2007-A ended its reinvestment period during the fourth quarter of 2010 and both CLO 2005-1 and CLO 2005-2 ended their reinvestment periods in the second quarter of 2011. As a result, principal proceeds from the assets held in each of these three transactions are generally used to amortize the outstanding balance of senior notes outstanding. During the three months ended March 31, 2012, $88.8 million of original CLO 2007-A, CLO 2005-1 and CLO 2005-2 senior notes were repaid. CLO 2006-1 and CLO 2007-1 will end their respective reinvestment periods during August 2012 and May 2014, respectively. CLO 2011-1 does not have a reinvestment period and all principal proceeds from holdings in CLO 2011-1 will be used to amortize the transaction. During the three months ended March 31, 2012, $5.1 million of original CLO 2011-1 senior notes were repaid. Accordingly, absent any new CLO transactions that we may enter into, our total investments held through CLOs will continue to decline as investments are paid down or paid off once the reinvestment period ends. In addition, pursuant to the terms of the indentures governing our CLO transactions, we have the ability to call in a CLO transaction by redeeming the notes and reinvesting the proceeds into a new CLO.

On an unconsolidated basis, which reflects our interests in our CLO subsidiaries as notes versus actual corporate loans and high yield securities on a consolidated basis, our investment portfolio primarily consists of the following holdings as of March 31, 2012:

·CLO note holdings:  We hold $1.2 billion par amount of mezzanine and subordinated notes in our six Cash Flow CLO transactions. As our Cash Flow CLOs are consolidated under accounting principles generally accepted in the United States of America (“GAAP”), these holdings are not reflected on our condensed consolidated balance sheet as the assets and liabilities of our CLO subsidiaries are consolidated and our ownership interests in the Cash Flow CLOs are eliminated for consolidation.

·Corporate loans:  Our corporate loans consist of bank loans that are held outside of our CLO transactions. These corporate loans have an aggregate par value of $254.2 million and estimated fair value of $177.2 million. These loans have a weighted average coupon of 6.5% and a weighted average coupon spread to LIBOR of 5.5%. In addition, we hold equity from one issuer with an estimated fair value of $28.2 million, which was restructured from a debt instrument to equity.

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·Corporate debt securities:  Our corporate debt securities consist of high yield bonds. These corporate debt securities have an aggregate par value of $18.1 million and estimated fair value of $17.5 million. These debt securities have a weighted average coupon of 15.0%.

·Natural resources:  Our natural resources holdings consist of (i) private equity focused on the oil and gas sector with an aggregate cost basis of $66.7 million and an estimated fair value of $75.8 million, (ii) oil and gas working interests in proved developed and proved undeveloped properties with a carrying amount of $160.4 million, partially financed with $66.8 million borrowed under a non-recourse, asset-based credit facility, and (iii) overriding royalty interests with a carrying amount of $50.7 million.

·Special situations:  Our special situations holdings consist of (i) $166.5 million par amount of debt with an $115.7 million amortized cost and estimated fair value of $128.5 million, (ii) $33.9 million amortized cost of equity, including warrants, with an estimated fair value of $36.4 million, and (iii) $15.6 million amortized cost of other investments with an estimated fair value of $16.5 million. The $166.5 million par amount of debt has a weighted average coupon of 8.1%.

·Mezzanine:  Our mezzanine holdings consist of (i) $48.6 million par amount of debt with an estimated fair value of $47.7 million and (ii) $4.7 million amortized cost of equity with an estimated fair value of $5.0 million. The $48.6 million par amount of mezzanine debt has a weighted average coupon of 13.7%.

·Private equity:  Our private equity holdings, excluding those related to the oil and gas sector, have an aggregate cost basis of $51.6 million with an estimated fair value of $53.2 million.

·Residential mortgage-backed securities (“RMBS”):  Our RMBS have an aggregate par amount of $179.0 million with an estimated fair value of $87.4 million.

Critical Accounting Policies

Our condensed consolidated financial statements are prepared by management in conformity with GAAP. Our significant accounting policies are fundamental to understanding our financial condition and results of operations because some of these policies require that we make significant estimates and assumptions that may affect the value of our assets or liabilities and financial results. We believe that certain of our policies are critical because they require us to make difficult, subjective, and complex judgments about matters that are inherently uncertain. We have reviewed these critical accounting policies with our board of directors and our audit committee.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:

Level 1:  Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets generally included in this category are equity securities listed in active markets.

Level 2:  Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

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The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value and certain financial instruments classified as derivatives.

Level 3:  Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value, RMBS and certain financial instruments classified as derivatives.

A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which we recognize at the end of the reporting period.

Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that we and others are willing to pay for an asset. Ask prices represent the lowest price that we and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets our best estimate of fair value.

Depending on the relative liquidity in the markets for certain assets, we may transfer assets to Level 3 if we determine that observable quoted prices, obtained directly or indirectly, are not available. The valuation techniques used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.

Corporate Debt Securities:  Corporate debt securities are initially valued at transaction price and are subsequently valued using market data for similar instruments (e.g., recent transactions or broker quotes), comparisons to benchmark derivative indices or valuation models. Valuation models are based on discounted cash flow techniques, for which the key inputs are the amount and timing of expected future cash flows, market yields for such instruments and recovery assumptions. Inputs are determined based on relative value analyses, which incorporate similar instruments from similar issuers.

Equity Investments, at Estimated Fair Value:  Equity investments, at estimated fair value, are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on a market and income (discounted cash flow) approaches, in which various internal and external factors are considered. Factors include the price at which the investment was acquired, the nature of the investment, current market conditions, recent public market and private transactions for comparable securities, and financing transactions subsequent to the acquisition of the investment. The fair value recorded for a particular investment will generally be within the range suggested by the two approaches.

Over-the-counter (“OTC”) Derivative Contracts:  OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit standing of reference entities, and equity prices. The fair value of OTC derivative products can be modeled using a series of techniques, including closed-form analytic formulae, such as the Black-Scholes option-pricing model, and simulation models or a combination thereof. Many pricing models do not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, as is the case for generic interest rate swap and option contracts.

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Residential Mortgage-Backed Securities at Estimated Fair Value:  Residential mortgage-backed securities are initially valued at transaction price and are subsequently valued using industry recognized models (including Intex and Bloomberg) and data for similar instruments (e.g., nationally recognized pricing services or broker quotes). The most significant inputs to the valuation of these instruments are default and loss expectations and market credit spreads.

Share-Based Compensation

We account for share-based compensation issued to members of our board of directors and our Manager using the fair value based methodology in accordance with GAAP. We do not have any employees, although we believe that members of our board of directors are deemed to be employees for purposes of interpreting and applying accounting principles relating to share-based compensation. We record as compensation costs the restricted common shares that we issued to members of our board of directors at estimated fair value as of the grant date and we amortize the cost into expense over the three-year vesting period using the straight-line method. We record compensation costs for restricted common shares and common share options that we issued to our Manager at estimated fair value as of the grant date and we remeasure the amount on subsequent reporting dates to the extent the awards have not vested. Unvested restricted common shares are valued using observable secondary market prices. Unvested common share options are valued using the Black-Scholes model and assumptions based on observable market data for comparable companies. We amortize compensation expense related to the restricted common shares and common share options that we granted to our Manager using the graded vesting attribution method.

Because we remeasure the amount of compensation costs associated with the unvested restricted common shares and unvested common share options that we issued to our Manager as of each reporting period, our share-based compensation expense reported in our condensed consolidated financial statements will change based on the estimated fair value of our common shares and this may result in earnings volatility. For the three months ended March 31, 2012, share-based compensation totaled $0.6 million. As of March 31, 2012, a $1 increase in the price of our common shares would have increased our future share-based compensation expense by approximately $0.4 million and this future share-based compensation expense would be recognized over the remaining vesting periods of our outstanding restricted common shares. As of March 31, 2012, the common share options were fully vested and expire in August 2014. As of March 31, 2012, future unamortized share-based compensation totaled $3.9 million, of which $1.9 million, $1.4 million and $0.6 million will be recognized in 2012, 2013 and beyond, respectively.

Accounting for Derivative Instruments and Hedging Activities

We recognize all derivatives on our condensed consolidated balance sheets at estimated fair value. On the date we enter into a derivative contract, we designate and document each derivative contract as one of the following at the time the contract is executed: (i) a hedge of a recognized asset or liability (“fair value” hedge); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (iii) a hedge of a net investment in a foreign operation; or (iv) a derivative instrument not designated as a hedging instrument (“free-standing derivative”). For a fair value hedge, we record changes in the estimated fair value of the derivative instrument and, to the extent that it is effective, changes in the fair value of the hedged asset or liability in the current period earnings in the same financial statement category as the hedged item. For a cash flow hedge, we record changes in the estimated fair value of the derivative to the extent that it is effective in other comprehensive (loss) income and subsequently reclassify these changes in estimated fair value to net income in the same period(s) that the hedged transaction affects earnings. The effective portion of the cash flow hedges is recorded in the same financial statement category as the hedged item. For free-standing derivatives, we report changes in the fair values in other income (loss).

We formally document at inception our hedge relationships, including identification of the hedging instruments and the hedged items, our risk management objectives, strategy for undertaking the hedge transaction and our evaluation of effectiveness of our hedged transactions. Periodically, we also formally assess whether the derivative designated in each hedging relationship is expected to be and has been highly effective in offsetting changes in estimated fair values or cash flows of the hedged item using either the dollar offset or the regression analysis method. If we determine that a derivative is not highly effective as a hedge, we discontinue hedge accounting.

We are not required to account for our derivative contracts using hedge accounting as described above. If we decide not to designate the derivative contracts as hedges or if we fail to fulfill the criteria necessary to qualify for hedge accounting, then the changes in the estimated fair values of our derivative contracts would affect periodic earnings immediately potentially resulting in the increased volatility of our earnings. The qualification requirements for hedge accounting are complex and as a result, we must evaluate, designate, and thoroughly document each hedge transaction at inception and perform ineffectiveness analysis and prepare related documentation at inception and on a recurring basis thereafter. As of March 31, 2012, the estimated fair value of our net derivative liabilities totaled $77.1 million.

Impairments

We monitor our available-for-sale securities portfolio for impairments. A loss is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. We consider many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of

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time the security has had a decline in estimated fair value below its amortized cost and the severity of the decline, the amount of the unrealized loss, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. In addition, for debt securities we consider our intent to sell the debt security, our estimation of whether or not we expect to recover the debt security’s entire amortized cost if we intend to hold the debt security, and whether it is more likely than not that we will be required to sell the debt security before its anticipated recovery. For equity securities, we also consider our intent and ability to hold the equity security for a period of time sufficient for a recovery in value.

The amount of the loss that is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary is dependent on certain factors. If the security is an equity security or if the security is a debt security that we intend to sell or estimate that it is more likely than not that we will be required to sell before recovery of its amortized cost, then the impairment amount recognized in earnings is the entire difference between the estimated fair value of the security and its amortized cost. For debt securities that we do not intend to sell or estimate that we are not more likely than not to be required to sell before recovery, the impairment is separated into the estimated amount relating to credit loss and the estimated amount relating to all other factors. Only the estimated credit loss amount is recognized in earnings, with the remainder of the loss amount recognized in other comprehensive income (loss).

This process involves a considerable amount of judgment by our management. As of March 31, 2012, we had aggregate unrealized losses on our securities classified as available-for-sale of approximately $7.6 million, which if not recovered may result in the recognition of future losses. During the three months ended March 31, 2012, we recorded charges for impairments of securities that we determined to be other-than-temporary totaling $0.7 million.

Allowance for Loan Losses

Our corporate loan portfolio is comprised of a single portfolio segment which includes one class of financing receivables, that is, high yield loans that are purchased via assignment or participation in either the primary or secondary market and are held primarily for investment. High yield loans are generally characterized as having below investment grade ratings or being unrated and generally consist of leveraged loans.

Our allowance for loan losses represents our estimate of probable credit losses inherent in our corporate loan portfolio held for investment as of the balance sheet date. Estimating our allowance for loan losses involves a high degree of management judgment and is based upon a comprehensive review of our loan portfolio that is performed on a quarterly basis. Our allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of our allowance for loan losses pertains to specific loans that we have determined are impaired. We determine a loan is impaired when we estimate that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis we perform a comprehensive review of our entire loan portfolio and identify certain loans that we have determined are impaired. Once a loan is identified as being impaired we place the loan on non-accrual status, unless the loan is already on non-accrual status, and record a reserve that reflects our best estimate of the loss that we expect to recognize from the loan. The expected loss is estimated as being the difference between our current cost basis of the loan, including accrued interest receivable, and the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the loan’s observable estimated fair value may be used.

The unallocated component of our allowance for loan losses represents our estimate of probable losses inherent in our loan portfolio as of the balance sheet date where the specific loan that the loan loss relates to is indeterminable. We estimate the unallocated component of our allowance for loan losses through a comprehensive review of our loan portfolio and identify certain loans that demonstrate possible indicators of impairment, including internally assigned credit quality indicators. This assessment excludes all loans that are determined to be impaired and as a result, an allocated reserve has been recorded as described in the preceding paragraph. Such indicators include, but are not limited to, the current and/or forecasted financial performance and liquidity profile of the issuer, specific industry or economic conditions that may impact the issuer, and the observable trading price of the loan if available. All loans are first categorized based on their assigned risk grade and further stratified based on the seniority of the loan in the issuer’s capital structure. The seniority classifications assigned to loans are senior secured, second lien and subordinate. Senior secured consists of loans that are the most senior debt in an issuer’s capital structure and therefore have a lower estimated loss severity than other debt that is subordinate to the senior secured loan. Senior secured loans often have a first lien on some or all of the issuer’s assets. Second lien consists of loans that are secured by a second lien interest on some or all of the issuer’s assets; however, the loan is subordinate to the first lien debt in the issuer’s capital structure. Subordinate consists of loans that are generally unsecured and subordinate to other debt in the issuer’s capital structure.

There are three internally assigned risk grades that are applied to loans that have not been identified as being impaired: high, moderate and low. High risk means that there is evidence of possible loss due to the financial or operating performance and liquidity of the issuer, industry or economic concerns specific to the issuer, or other factors that indicate that the breach of a covenant contained in the related loan agreement is possible. Moderate risk means that while there is not observable evidence of loss, there are issuer and/or industry specific trends that indicate a loss may have occurred. Low risk means that while there is no identified evidence of loss, there is the risk of loss inherent in the loan that has not been identified. All loans held for investment, with the exception of loans that have been identified as impaired, are assigned a risk grade of high, moderate or low.

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We apply a range of default and loss severity estimates in order to estimate a range of loss outcomes upon which to base our estimate of probable losses that results in the determination of the unallocated component of our allowance for loan losses. As of March 31, 2012, the range of outcomes used to estimate concern as to the probability of default was between 1% and 20% and the range of loss severity assumptions was between 5% and 85%. The estimates and assumptions we use to estimate our allowance for loan losses are based on our estimated range of outcomes that are determined from industry information providing both historical and forecasted empirical performance of the type of corporate loans that we invest in, as well as from our own estimates based on the nature of our corporate loan portfolio. These estimates and assumptions are susceptible to change due to our corporate loan portfolio’s performance as well as industry and general economic conditions. Changes in the assumptions and estimates used to estimate our allowance for loan losses could have a material impact on our financial condition and results of operations. The default and loss severity estimates used in determining our allowance for loan losses are assessed on a quarterly and annual basis. As of March 31, 2012, management believes that these estimates are appropriate and consistent with historical and forecasted estimates evidenced and used in both industry and our corporate loan portfolio.

As of March 31, 2012, our allowance for loan losses totaled $235.8 million.

Results of Operations

Summary

The following discussion presents an analysis of our results of operations on a comparative basis for the three months ended March 31, 2012 and 2011. Our results of operations may be materially affected by market fluctuations and current economic events, particularly in the fixed income and equity markets. A summary of key financial results are as follows (amounts in thousands, except per share information):

	For the three months ended March 31, 2012			For the three months ended March 31, 2011
Net investment income	$	37,862		$	79,452
Total other income	78,931			46,436
Total non-investment expenses	32,813			30,804
Income before income tax expense	83,980			95,084
Income tax (benefit) expense	(4,068		)	1,317
Net income	$	88,048		$	93,767
Net income per share—diluted	$	0.48		$	0.51

Net Investment Income

The following table presents the components of our net investment income for the three months ended March 31, 2012 and 2011:

Comparative Net Investment Income Components

(Amounts in thousands)

	For the threemonths ended March 31, 2012		For the threemonths ended March 31, 2011
Investment Income:
Corporate loans and securities interest income	$	102,126	$	97,126
Residential mortgage-backed securities interest income	2,962		4,032
Other investment income	11,100		2,946
Dividend income	164		183
Net discount accretion	21,582		31,043
Total investment income	137,934		135,330
Interest Expense:
Collateralized loan obligation secured debt	18,263		14,737
Credit facilities	1,032		710
Senior notes	5,697		—
Convertible senior notes	6,113		6,990
Junior subordinated notes	3,949		3,868
Interest rate swaps	5,585		5,661
Other interest expense	76		155
Total interest expense	40,715		32,121
Interest expense to affiliates	12,859		12,096
Provision for loan losses	46,498		11,661
Net investment income	$	37,862	$	79,452

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As presented in the table above, net investment income decreased by $41.6 million from $79.5 million for the three months ended March 31, 2011 to $37.9 million for the same period in 2012. Net investment income is comprised of total investment income, net of interest expense and provision for loan losses.

Total investment income, consisting primarily of interest income and discount accretion from our corporate debt investment portfolio, totaled $137.9 million for the three months ended March 31, 2012 and $135.3 million for the three months ended March 31, 2011. The increase in total investment income of $2.6 million was primarily attributable to an increase in other investment income from revenue earned on our working and royalty interests in oil and gas properties of $8.1 million. We began acquiring working and royalty interests in oil and gas properties during the fourth quarter of 2010. We expect that as we continue to grow our natural resources holdings, the related net revenue will steadily increase as production increases through the acquisition of additional oil and gas assets and drilling of existing undeveloped property. These revenues are included within the Other segments for segment reporting purposes. Furthermore, the increase in total investment income was attributable to $5.0 million of additional corporate loans and securities interest income earned primarily from a higher yielding corporate debt portfolio. As the majority of our corporate debt portfolio is floating rate indexed to three-month LIBOR, increases in these LIBOR rates will positively impact interest income. At March 31, 2012, the three-month LIBOR rate was 0.47%, or an average rate of 0.51% for the first quarter of 2012, compared to 0.30% at March 31, 2011, or an average rate of 0.31% for the first quarter of 2011. In addition, as of March 31, 2012, approximately 33.5% of our floating rate corporate debt portfolio had LIBOR floors with a weighted average floor of 1.4%, compared to approximately 25.0% of our floating rate corporate debt portfolio with a weighted average floor of 1.7% for the quarter ended March 31, 2011. Offsetting these increases was a decrease in net discount accretion of $9.5 million primarily due to additional paydowns during the three months ended March 31, 2011, which resulted in $7.7 million of higher accelerated discount accretion compared to the three months ended March 31, 2012.

Total interest expense increased $8.6 million for the three months ended March 31, 2012 from the same period in 2011 primarily due to $5.7 million of interest expense on our senior notes offerings and $3.5 million of additional interest expense on our collateralized loan obligation secured debt. Our 8.375% and 7.500% 30-year senior notes were issued in November 2011 and March 2012, respectively.

The provision for loan losses totaled $46.5 million for the three months ended March 31, 2012 compared to $11.7 million for the three months ended March 31, 2011. The increase in provision for loan losses was largely as a result of an increase in the unallocated component of our allowance for loan losses based on a review of our unimpaired, held for investment loan portfolio, with particular sensitivity to the loans that we have designated as high risk within our internally assigned risk grades. Refer to “Corporate Debt Portfolio - Allowance for Loan Losses” below for further discussion.

Other Income

The following table presents the components of other income for the three months ended March 31, 2012 and 2011:

Comparative Other Income Components

(Amounts in thousands)

	For the three months ended March 31, 2012			For the three months ended March 31, 2011
Net realized and unrealized gain on derivatives and foreign exchange:
Commodity swaps	$	4,734		$	(284	)
Credit default swaps	2,051			117
Total rate of return swaps	141			31
Common stock warrants	736			718
Foreign exchange(1)	1,487			5,485
Total realized and unrealized gain on derivatives and foreign exchange	9,149			6,067
Net realized and unrealized gain (loss) on residential mortgage-backed securities, at estimated fair value	3,047			(738		)
Net realized and unrealized gain on investments(2)	64,310			40,014
Net realized and unrealized gain on securities sold, not yet purchased	11			145
Impairment of securities available-for-sale and private equity at cost	(733		)	(975		)
Net loss on restructuring and extinguishment of debt	(445		)	—
Other income	3,592			1,923
Total other income	$	78,931		$	46,436

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(1)Includes foreign exchange contracts and foreign exchange remeasurement gain or loss.

(2)Includes lower of cost or estimated fair value adjustment to corporate loans held for sale and unrealized gain (loss) on investments held at estimated fair value.

As presented in the table above, other income increased $32.5 million from $46.4 million for the three months ended March 31, 2011 to $78.9 million for the three months ended March 31, 2012. The increase in total other income was primarily attributable to an increase in realized and unrealized gain on investments of $24.3 million, primarily as a result of an increase in realized gains from the sales and paydowns of certain investments, as well as an additional $8.8 million reduction in the lower of cost of estimated fair market value adjustment to corporate loans held for sale recorded during the three months ended March 31, 2012 as compared to the prior period.

Non-Investment Expenses

The following table presents the components of non-investment expenses for the three months ended March 31, 2012 and 2011:

Comparative Non-Investment Expense Components

(Amounts in thousands)

	For the three months ended March 31, 2012		For the three months ended March 31, 2011
Related party management compensation:
Base management fees	$	7,002	$	6,215
Incentive fees	9,670		12,013
Share-based compensation	383		1,634
CLO management fees	1,058		1,339
Related party management compensation	18,113		21,201
Professional services	1,896		1,432
Insurance	436		587
Directors’ expenses	718		535
Other general and administrative	11,650		7,049
Total non-investment expenses	$	32,813	$	30,804

As presented in the table above, our non-investment expenses increased $2.0 million from the three months ended March 31, 2011 to the same period in 2012. The significant components of non-investment expense are described below.

Related party management compensation consists of base management fees payable to our Manager pursuant to the Management Agreement, incentive fees, collateral management fees, and share-based compensation related to restricted common shares and common share options granted to our Manager.

The base management fee payable was calculated in accordance with the Management Agreement and is based on an annual rate of 1.75% times our “equity” as defined in the Management Agreement. Base management fees increased by $0.8 million from the three months ended March 31, 2011 to the three months ended March 31, 2012 primarily due to an increase in “equity” resulting from net income earned throughout 2011 and into 2012.

Our Manager is also entitled to a quarterly incentive fee provided that our quarterly “net income,” as defined in the Management Agreement, before the incentive fee exceeds a defined return hurdle. Incentive fees of $9.7 million were earned by the Manager during the three months ended March 31, 2012 as compared to $12.0 million during the three months ended March 31, 2011.

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An affiliate of our Manager entered into separate management agreements with the respective investment vehicles CLO 2005-1, CLO 2005-2, CLO 2006-1, CLO 2007-1, CLO 2007-A and CLO 2011-1 and is entitled to receive fees for the services performed as collateral manager for all of these CLOs, except for CLO 2011-1. The collateral manager has the option to waive the fees it earns for providing management services for the CLOs and has done so in prior periods.

During the three months ended March 31, 2012 and 2011, the collateral manager waived the management fees for all CLOs, except for CLO 2005-1, and waived aggregate CLO management fees of $8.3 million and $8.8 million, respectively. For the three months ended March 31, 2012 and 2011, we recorded an expense for CLO management fees totaling $1.1 million and $1.3 million, respectively.

Professional services expenses consist of legal, accounting and other professional services. Directors’ expenses represent share-based compensation, as well as expenses and reimbursements due to the board of directors for their services.

Other general and administrative expenses increased $4.6 million from the three months ended 2011 to the same period in 2012. The increase was primarily attributable to an increase of $6.0 million of expenses related to the acquisition, management and operation of our working and overriding royalty interests, including recurring charges for depreciation, depletion and amortization for our natural resources investments. As we began acquiring working interests and overriding royalty interests during the fourth quarter of 2010 and have subsequently continued acquisitions, additional related expenses were incurred throughout 2011 and into the first quarter of 2012. These expenses are included within the Other segments for segment reporting purposes. We expect that as we continue to increase our holdings in natural resources assets, our total expenses will increase accordingly as certain acquisition and transaction costs are nonrecurring and expensed upfront at the time of purchase. In addition, for the three months ended March 31, 2012 and 2011, other general and administrative expenses included expenses incurred by our Manager on our behalf that were reimbursable to our Manager pursuant to the Management Agreement. For the three months ended March 31, 2012 and 2011, we incurred reimbursable general and administrative expenses to our Manager of $2.0 million and $1.7 million, respectively.

Income Tax Provision

We intend to continue to operate so as to qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation. Therefore, we generally are not subject to United States federal income tax at the entity level, but are subject to limited state and foreign income taxes. Holders of our shares are required to take into account their allocable share of each item of our income, gain, loss, deduction and credit for our taxable year ending within or with their taxable year.

During 2012, we owned an equity interest in KKR Financial Holdings II, LLC (“KFH II”), which elected to be taxed as a REIT under the Code. KFH II holds certain real estate mortgage-backed securities. A REIT is not subject to United States federal income tax to the extent that it currently distributes its income and satisfies certain asset, income and ownership tests, and recordkeeping requirements, but it may be subject to some amount of federal, state, local and foreign taxes based on its taxable income.

We have wholly-owned domestic and foreign subsidiaries that are taxable as corporations for United States federal income tax purposes and thus are not consolidated by us for United States federal income tax purposes. For financial reporting purposes, current and deferred taxes are provided for on the portion of earnings recognized by us with respect to our interest in the domestic taxable corporate subsidiaries, because each is taxed as a regular corporation under the Code. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP condensed consolidated financial statements and the United States federal income tax basis of assets and liabilities as of each condensed consolidated balance sheet date. The foreign corporate subsidiaries were formed to make certain foreign and domestic investments from time to time. The foreign corporate subsidiaries are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands, and are anticipated to be exempt from United States federal and state income tax at the corporate entity level because they restrict their activities in the United States to trading in stock and securities for their own account. They generally will not be subject to corporate income tax in our financial statements on their earnings, and no provisions for income taxes for the three months ended March 31, 2012 were recorded; however, we will be required to include their current taxable income in our calculation of our taxable income allocable to shareholders.

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KFH II, our REIT subsidiary, is not expected to incur a federal tax expense, but is subject to limited state income tax expense related to the 2012 tax year. For the three months ended March 31, 2012, we recorded $3.3 million of federal and $0.8 million of state tax benefit for our domestic taxable corporate subsidiaries. Additionally, we recorded less than $0.1 million state and foreign tax expense for our non-corporate subsidiaries for the three months ended March 31, 2012. Accordingly, for the three months ended March 31, 2012, we recorded income tax benefit of $4.1 million. As of March 31, 2012, the tax liability of $1.9 million associated with the deferred portion of the $4.1 million tax benefit was included in accounts payable, accrued expenses and other liabilities on our condensed consolidated balance sheet. For the three months ended March 31, 2011, we recorded $1.1 million of tax expense, consisting of $0.8 million of federal tax expense and $0.3 million of state tax expense for our domestic taxable corporate subsidiaries.

Segment Reporting

We operate our business through multiple reportable business segments, which we have determined to be credit (‘‘Credit’’) and other segments (‘‘Other’’). Our segments are differentiated primarily by our investment focuses. The Credit segment includes primarily below investment grade corporate debt. The Other segments include all other portfolio holdings, including oil and natural gas working interests and overriding royalty interests.

Prior to 2011, we operated under a single business segment of Credit. However, during 2011, we began purchasing additional working interests and overriding royalty interests in oil and natural gas properties. As of December 31, 2011, we determined that we met certain segment reporting requirements and accordingly, we began disclosing information by segment based on our acquisition of additional natural resources assets, combined with our belief that other areas of investment focus including natural resources, while currently not material, may become a significant part of our business. The segments currently reported are consistent with the way decisions regarding the allocation of resources are made, as well as how we review our operating results.

We evaluate our performance based on our segments described above. Consolidated net income decreased $5.7 million for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 primarily due to a decline in consolidated net investment income. Consolidated net investment income decreased $41.6 million primarily due to a decrease in net investment income of $49.4 million largely related to the provision for loan losses recorded in the Credit segment. This decrease was partially offset by an increase of $7.8 million in net investment income related to the Other segments, which was attributable to the revenue earned on our working interests and overriding royalty interests acquired beginning from the fourth quarter of 2010. The overall decrease in net income was partially offset by an increase in consolidated other income of $32.5 million, comprised of a $27.5 million increase in the Credit segment and a $5.0 million increase in the Other segments. The $27.5 million increase in the Credit segment was primarily due to net realized gains from sales and paydowns of certain corporate debt investments, while the $5.0 million increase in the Other segments was primarily due to net unrealized gains on commodity derivatives. Total assets in our Other segments increased $88.8 million from $158.6 million as of December 31, 2011 to $247.4 million as of March 31, 2012, primarily due to our acquisition of working interests in oil and natural gas properties. For further financial information related to our segments, refer to ‘‘Part I - Item 1. Financial Statements—Note 13. Segment Reporting’’.

Investment Portfolio

Our investment portfolio primarily consists of corporate debt holdings, comprised of corporate loans and corporate debt securities. The details of our corporate debt portfolio are discussed below under “Corporate Debt Portfolio”. Also included in our investment portfolio are our equity holdings carried at estimated fair value, and our oil and gas working interests and overriding royalty interests.

The following table summarizes the carrying value of our investment portfolio by strategy as of March 31, 2012 (amounts in thousands):

	Bank Loans & High Yield		Natural Resources		Special Situations		Mezzanine		Private Equity		Total
Corporate loans(1)	$	6,123,696	$	—	$	39,836	$	45,218	$	—	$	6,208,750
Securities(2)	681,066		—		93,997		3,333		—		778,396
Equity investments, at estimated fair value(3)	34,335		75,750		36,258		4,592		52,707		203,642
Other assets	—		211,007		15,711		330		450		227,498
Total	$	6,839,097	$	286,757	$	185,802	$	53,473	$	53,157	$	7,418,286

(1)Includes loans held for sale and loans at estimated fair value. Amounts presented are gross of allowance for loan losses totaling $235.8 million as of March 31, 2012.

(2)Excludes our investments in residential mortgage-backed securities with an estimated fair value of $87.4 million and securities sold, not yet purchased with an estimated fair value of $1.2 million.

(3)Includes certain marketable equity securities and private equity investments, including bank loans and high yield debt securities which were restructured from debt instruments to equity, for which we elected the fair value option of accounting.

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Corporate Debt Portfolio

Our corporate debt investment portfolio primarily consists of investments in corporate loans and debt securities. Our corporate loans primarily consist of senior secured, second lien and subordinated loans. The corporate loans we invest in are generally below investment grade and are floating rate indexed to either one-month or three-month LIBOR. Our investments in corporate debt securities primarily consist of fixed rate investments in below investment grade corporate bonds that are senior secured, senior unsecured and subordinated. We evaluate and monitor the asset quality of our investment portfolio by performing detailed credit reviews and by monitoring key credit statistics and trends. The key credit statistics and trends we monitor to evaluate the quality of our investments include credit ratings of both our investments and the issuer, financial performance of the issuer including earnings trends, free cash flows of the issuer, debt service coverage ratios of the issuer, financial leverage of the issuer, and industry trends that have or may impact the issuer’s current or future financial performance and debt service ability.

We do not require specific collateral or security to support our corporate loans and debt securities; however, these loans and debt securities are either secured through a first or second lien on the assets of the issuer or are unsecured. We do not have access to any collateral of the issuer of the corporate loans and debt securities, rather the seniority in the capital structure of the loans and debt securities determines the seniority of our investment with respect to prioritization of claims in the event that the issuer defaults on the outstanding debt obligation.

Corporate Loans

Our corporate loan portfolio had an aggregate par value of $6.6 billion and $7.1 billion as of March 31, 2012 and December 31, 2011, respectively. Our corporate loan portfolio consists of debt obligations of corporations, partnerships and other entities in the form of senior secured loans, second lien loans and subordinated loans.

The following table summarizes our corporate loans portfolio stratified by type as of March 31, 2012 and December 31, 2011. Loans that are not deemed to be held for sale are carried at amortized cost net of allowance for loan losses on our condensed consolidated balance sheets. Loans that are classified as held for sale are carried at the lower of net amortized cost or estimated fair value on our condensed consolidated balance sheets. We also have certain loans that we elected to carry at estimated fair value.

Corporate Loans

(Amounts in thousands)

	March 31, 2012(1)									December 31, 2011(1)
	Par		Carrying Value			Amortized Cost		Estimated Fair Value		Par		Carrying Value			Amortized Cost		Estimated Fair Value
Senior secured	$	5,873,134	$	5,658,120		$	5,658,120	$	5,515,669	$	6,329,636	$	6,085,696		$	6,085,696	$	5,826,951
Second lien	515,136		480,892			480,892		419,809		474,903		434,705			434,705		351,484
Subordinated	198,461		108,183			108,183		159,237		251,124		165,228			165,228		183,975
Subtotal	6,586,731		6,247,195			6,247,195		6,094,715		7,055,663		6,685,629			6,685,629		6,362,410
Lower of cost or fair value adjustment	—		(39,597		)	—		—		—		(50,906		)	—		—
Allowance for loan losses	—		(235,807		)	—		—		—		(191,407		)	—		—
Unrealized gains			1,152									83
Total	$	6,586,731	$	5,972,943		$	6,247,195	$	6,094,715	$	7,055,663	$	6,443,399		$	6,685,629	$	6,362,410

(1)Includes loans held for sale and loans carried at estimated fair value.

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As of March 31, 2012, $6.6 billion par amount, or 99.7%, of our corporate loan portfolio was floating rate and $18.4 million par amount, or 0.3%, was fixed rate. In addition, as of March 31, 2012, $264.7 million par amount, or 4.0%, of our corporate loan portfolio was denominated in foreign currencies, of which 75.0% was denominated in euros. As of December 31, 2011, $7.0 billion par amount, or 99.9%, of our corporate loan portfolio was floating rate and $9.4 million par amount, or 0.1%, was fixed rate. In addition, as of December 31, 2011, $278.5 million par amount, or 3.9%, of our corporate loan portfolio was denominated in foreign currencies, of which 76.7% was denominated in euros.

All of our floating rate corporate loans have index reset frequencies of less than twelve months with the majority resetting at least quarterly. The weighted average coupon on our floating rate corporate loans was 4.8% as of March 31, 2012 and 4.6% as of December 31, 2011, and the weighted average coupon spread to LIBOR of our floating rate corporate loan portfolio was 4.0% as of March 31, 2012 and 3.9% as of December 31, 2011. The weighted average years to maturity of our floating rate corporate loans was 4.1 years as of March 31, 2012 and December 31, 2011.

As of March 31, 2012, our fixed rate corporate loans had a weighted average coupon of 13.2% and a weighted average years to maturity of 1.9 years, as compared to 11.7% and 3.7 years, respectively, as of December 31, 2011.

Non-accrual Loans

We hold certain corporate loans designated as being non-accrual, impaired and/or in default. Non-accrual loans consist of both corporate loans held for investment and corporate loans held for sale. Loans are placed on non-accrual when there is uncertainty regarding whether future income amounts on the loan will be earned and collected. While on non-accrual status, interest income is recognized using the cost-recovery method, cash-basis method or some combination of the two methods. A loan is placed back on accrual status when the ultimate collectability of the principal and interest is not in doubt. When placed on non-accrual status, previously recognized accrued interest is reversed and charged against current income.

The following table summarizes our recorded investment in non-accrual loans as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	March 31, 2012		December 31, 2011
Non-accrual loans (recorded investment):
Impaired loans held for investment	$	69,028	$	68,692
Loans held for sale	100,291		99,999
Total non-accrual loans	$	169,319	$	168,691

The $0.6 million increase in non-accrual loans from $168.7 million as of December 31, 2011 to $169.3 million as of March 31, 2012 was primarily due to foreign exchange remeasurement, partially offset by paydowns. During the three months ended March 31, 2012 and 2011, we recognized $4.4 million and $4.0 million, respectively, of interest income from cash receipts for loans on non-accrual status.

Impaired Loans

Impaired loans consist of loans held for investment where we have determined that it is more likely than not that we will not recover our outstanding investment in the loan under the contractual terms of the loan agreement. Impaired loans may or may not be in default at the time a loan is designated as being impaired and all impaired loans are placed on non-accrual status. Impaired loans increased from $68.7 million as of December 31, 2011 to $69.0 million as of March 31, 2012 due to $0.3 million of foreign exchange remeasurement, partially offset by paydowns.

Defaulted Loans

Defaulted loans consist of corporate loans that have defaulted under the contractual terms of their loan agreements.  The balance of defaulted loans may be comprised of loans held for investment and loans held for sale. Loans that are held for sale are carried at the lower of amortized cost or estimated market value and, accordingly, no allowance for loan losses is maintained for such loans. In contrast,  loans that are specifically identified as being impaired have a specific allocated reserve that represents the excess of the loan’s amortized cost amount over its estimated fair value.  Since defaulted loans may primarily consist of loans classified as held for sale and impaired loans consist of only loans held for investment, fluctuations in the balances of defaulted loans will not necessarily correspond to fluctuations in impaired loans. As of March 31, 2012, we held corporate loans that were in default with a total amortized cost of $27.6 million from one issuer. These loans in default were included in the loans for which the allocated component of our allowance for loan losses was related to, or for which we determined were loans held for sale as of March 31, 2012. As of December 31, 2011, we had no corporate loans in default.

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Troubled Debt Restructurings

During the three months ended March 31, 2012 and 2011, there were no loan modifications that qualified as troubled debt restructurings.

During the three months ended March 31, 2012 and 2011, we modified $457.1 million and $540.4 million amortized cost of corporate loans, respectively, that did not qualify as troubled debt restructurings. These modifications involved changes in existing rates and maturities to prevailing market rates/maturities for similar instruments and did not qualify as troubled debt restructurings as the respective borrowers were neither experiencing financial difficulty nor were seeking (nor granted) a concession as part of the modification. In addition, these modifications of non-troubled debt holdings were accomplished with modified loans that were not substantially different from the loans prior to modification.

Allowance For Loan Losses

The following table summarizes the changes in our allowance for loan losses for the three months ended March 31, 2012 and 2011 (amounts in thousands):

	For the three months ended March 31, 2012			For the three months ended March 31, 2011
Balance at beginning of year	$	191,407		$	209,030
Provision for loan losses	46,498			11,661
Charge-offs	(2,098		)	(22,109		)
Balance at end of year	$	235,807		$	198,582

As of March 31, 2012 and December 31, 2011, we had an allowance for loan loss of $235.8 million and $191.4 million, respectively. As described under “Critical Accounting Policies”, our allowance for loan losses represents our estimate of probable credit losses inherent in our corporate loan portfolio held for investment as of the balance sheet date. Estimating our allowance for loan losses involves a high degree of management judgment and is based upon a comprehensive review of our loan portfolio that is performed on a quarterly basis. Our allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of our allowance for loan losses pertains to specific loans that we have determined are impaired. We determine a loan is impaired when we estimate that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis we perform a comprehensive review of our entire loan portfolio and identify certain loans that we have determined are impaired. Once a loan is identified as being impaired we place the loan on non-accrual status, unless the loan is already on non-accrual status, and record a reserve that reflects our best estimate of the loss that we expect to recognize from the loan. The expected loss is estimated as being the difference between our current cost basis of the loan, including accrued interest receivable, and the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the loan’s observable estimated fair value may be used.

The unallocated component of our allowance for loan losses represents our estimate of probable losses inherent in our loan portfolio as of the balance sheet date where the specific loan that the loan loss relates to is indeterminable. We estimate the unallocated component of our allowance for loan losses through a comprehensive quarterly review of our loan portfolio and identify certain loans that demonstrate possible indicators of impairment, including internally assigned credit quality indicators. This assessment excludes all loans that are determined to be impaired and as a result, an allocated reserve has been recorded as described in the preceding paragraph. Such indicators include, but are not limited to, the current and/or forecasted financial performance and liquidity profile of the issuer, specific industry or economic conditions that may impact the issuer, and the observable trading price of the loan if available. All loans are first categorized based on their assigned risk grade and further stratified based on the seniority of the loan in the issuer’s capital structure. The seniority classifications assigned to loans are senior secured, second lien and subordinate. Senior secured consists of loans that are the most senior debt in an issuer’s capital structure and therefore have a lower estimated loss severity than other debt that is subordinate to the senior secured loan. Senior secured loans often have a first lien on some or all of the issuer’s assets. Second lien consists of loans that are secured by a second lien interest on some or all of the issuer’s assets; however, the loan is subordinate to the first lien debt in the issuer’s capital structure. Subordinate consists of loans that are generally unsecured and subordinate to other debt in the issuer’s capital structure.

There are three internally assigned risk grades that are applied to loans that have not been identified as being impaired: high, moderate and low. High risk means that there is evidence of possible loss due to the financial or operating performance and liquidity of the issuer, industry or economic concerns specific to the issuer, or other factors that indicate that the breach of a covenant contained in the related loan agreement is possible. Moderate risk means that while there is not observable evidence of loss, there are issuer and/or industry specific trends that indicate a loss may have occurred. Low risk means that while there is no identified evidence of loss, there is the risk of loss inherent in the loan that has not been identified. All loans held for investment, with the exception of loans that have been identified as impaired, are assigned a risk grade of high, moderate or low.

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We apply a range of default and loss severity estimates in order to estimate a range of loss outcomes upon which to base our estimate of probable losses that results in the determination of the unallocated component of our allowance for loan losses.

As of March 31, 2012, the allocated component of our allowance for loan losses totaled $34.5 million and relates to investments in certain loans issued by five issuers with an aggregate par amount of $84.0 million and an aggregate recorded investment of $69.0 million. As of December 31, 2011, the allocated component of our allowance for loan losses totaled $33.8 million and relates to investments in certain loans issued by five issuers with an aggregate par amount of $83.5 million and an aggregate recorded investment of $68.7 million.

The unallocated component of our allowance for loan losses totaled $201.3 million and $157.6 million as of March 31, 2012 and December 31, 2011, respectively. As discussed above, we estimate the unallocated reserve by first categorizing our corporate loans held for investment portfolio based on their assigned risk grade and then based on the seniority of the loan in the issuer’s capital structure. Of the three internally assigned risk grades, as of March 31, 2012, we had loans issued from ten issuers with an aggregate par value and amortized cost amount of $1.1 billion that we classified as high risk. Approximately 88% of the amortized cost balance of loans classified as high risk consisted of the following holdings: i) $311.4 million amortized cost amount of loans issued by Modular Space Corporation; ii) $309.2 million amortized cost amount of loans issued by Texas Competitive Electric Holdings Company LLC;  iii) $205.3 million amortized cost amount of loans issued by First Data Corporation; iv) $69.2 million amortized cost amount of loans issued by Realogy Corporation; and, v) $60.7 million amortized cost amount of loans issued by Caesars Entertainment Operating Company. Through review of our loan portfolio during the first quarter ended March 31, 2012, with particular sensitivity to the loans that we have designated as high risk, especially Texas Competitive Electric Holdings Company LLC, we determined an increase in the unallocated component of our allowance for loan losses was appropriate.

During the three months ended March 31, 2012 and 2011, we recorded charge-offs totaling $2.1 million and $22.1 million, respectively, comprised primarily of loans transferred to loans held for sale.

Loans Held For Sale and the Lower of Cost or Fair Value Adjustment

The following table summarizes the changes in our loans held for sale balance as of March 31, 2012 and 2011 (amounts in thousands):

	March 31, 2012			March 31, 2011
Loans Held for Sale:
Beginning balance	$	317,332		$	463,628
Transfers in	46,077			582,878
Transfers out	(7,504		)	(97,855		)
Sales, paydowns, restructurings and other	(68,598		)	(80,410		)
Lower of cost or estimated fair value adjustment(1)	10,401			1,567
Net carrying value	$	297,708		$	869,808

(1)Represents the recorded net adjustment to earnings for the respective period.

As of March 31, 2012, we had $297.7 million of loans held for sale, a decrease of $19.6 million from December 31, 2011 primarily due to the sale and paydown of certain loans, partially offset by the net transfer of loans from held for investment to held for sale as described below.

During the three months ended March 31, 2012 and 2011, we transferred $46.1 million and $582.8 million amortized cost amount, respectively, of loans from held for investment to held for sale. The transfers of certain loans to held for sale were due to our determination that credit quality of a loan in relation to its expected risk-adjusted return no longer met our investment objective and our determination to reduce or eliminate the exposure for certain loans as part of our portfolio risk management practices. Also, during the three months ended March 31, 2012 and 2011, we transferred $7.5 million and $97.9 million amortized cost amount, respectively, from loans held for sale back to loans held for investment as the circumstances that led to the initial transfer to held for sale were no longer present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby we determined that selling the asset no longer met our investment objective and strategy.

We reduced the lower of cost or market valuation allowance by $10.4 million for the three months ended March 31, 2012 for certain loans held for sale which had a carrying value of $297.7 million as of March 31, 2012. We reduced the lower of cost or market valuation allowance by $1.6 million for the three months ended March 31, 2011 for certain loans held for sale which had a carrying value of $869.8 million as of March 31, 2011.

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Concentration Risk

Our corporate loan portfolio has certain credit risk concentrated in a limited number of issuers. As of March 31, 2012, approximately 48% of the total amortized cost basis of our corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foodservice, Texas Competitive Electric Holdings Company LLC, and Modular Space Corporation, which combined represented $993.9 million, or approximately 16% of the aggregated amortized cost basis of the our corporate loans. As of December 31, 2011, approximately 47% of the total amortized cost basis of our corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foodservice, Texas Competitive Electric Holdings Company LLC and Modular Space Corporation, which combined represented $992.5 million, or approximately 15% of the aggregated amortized cost basis of our corporate loans.

Corporate Debt Securities

Our corporate debt securities portfolio had an aggregate par value of $790.4 million and $869.7 million as of March 31, 2012 and December 31, 2011, respectively. Our corporate debt securities portfolio consists of debt obligations of corporations, partnerships and other entities in the form of senior secured, senior unsecured and subordinated bonds. Our corporate debt securities are included in securities on our condensed consolidated balance sheets.

The following table summarizes our corporate debt securities portfolio stratified by type as of March 31, 2012 and December 31, 2011:

Corporate Debt Securities

(Amounts in thousands)

	March 31, 2012(1)								December 31, 2011(1)
	Par		Carrying Value		Amortized Cost		Estimated Fair Value		Par		Carrying Value		Amortized Cost		Estimated Fair Value
Senior secured	$	302,699	$	299,468	$	282,343	$	299,468	$	312,876	$	298,467	$	294,472	$	298,467
Senior unsecured	404,755		398,570		345,405		398,570		465,948		448,407		395,932		448,407
Subordinated	82,932		73,875		61,237		73,875		90,881		76,040		67,501		76,040
Total	$	790,386	$	771,913	$	688,985	$	771,913	$	869,705	$	822,914	$	757,905	$	822,914

(1)In addition to certain corporate debt securities available-for-sale, these amounts include other corporate debt securities carried at estimated fair value, which have unrealized gains and losses recorded in the condensed consolidated statements of operations.

As of March 31, 2012, $638.9 million par amount, or 80.8%, of our corporate debt securities portfolio was fixed rate and $151.5 million par amount, or 19.2%, was floating rate. In addition, as of March 31, 2012, $49.0 million par amount, or 6.2%, of our corporate debt securities portfolio, was denominated in foreign currencies, of which 55.3% was denominated in euros. As of December 31, 2011, $660.5 million, or 75.9%, of our corporate debt securities portfolio was fixed rate and $209.2 million, or 24.1%, was floating rate. In addition, as of December 31, 2011, $72.4 million par amount, or 8.3%, of our corporate debt securities portfolio, was denominated in foreign currencies, of which 67.5% was denominated in euros.

As of March 31, 2012, our fixed rate corporate debt securities had a weighted average coupon of 9.5% and a weighted average years to maturity of 5.7 years, as compared to 9.6% and 6.0 years, respectively, as of December 31, 2011. All of our floating rate corporate debt securities have index reset frequencies of less than twelve months. The weighted average coupon on our floating rate corporate debt securities was 6.7% as of March 31, 2012 and 6.0% as of December 31, 2011, and the weighted average coupon spread to LIBOR of our floating rate corporate debt securities was 5.9% as of March 31, 2012 and 5.3% as of December 31, 2011. The weighted average years to maturity of our floating rate corporate debt securities was 2.7 years and 2.8 years as of March 31, 2012 and December 31, 2011, respectively.

During the three months ended March 31, 2012 and March 31, 2011, we recorded impairment losses totaling $0.7 million and zero, respectively, for corporate debt securities that we determined to be other-than-temporarily impaired. These securities were determined to be other-than-temporarily impaired either due to our determination that recovery in value was no longer likely or because we decided to sell the respective security in response to specific credit concerns regarding the issuer.

As of March 31, 2012 and December 31, 2011, we had no corporate debt securities in default.

Concentration Risk

Our corporate debt securities portfolio has certain credit risk concentrated in a limited number of issuers. As of March 31, 2012, approximately 49% of the estimated fair value of our corporate debt securities portfolio was concentrated in ten issuers, with the two largest concentrations of debt securities in securities issued by First Data Corporation and SandRidge Energy, Inc., which

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combined represented $140.5 million, or approximately 19% of the estimated fair value of our corporate debt securities. As of December 31, 2011, approximately 46% of the estimated fair value of our corporate debt securities portfolio was concentrated in ten issuers, with the two largest concentrations of debt securities in securities issued by First Data Corporations and SandRidge Energy, Inc., which combined represented $138.3 million, or approximately 17% of the estimated fair value of our corporate debt securities.

Other Holdings

Our other holdings primarily consist of marketable and private equity investments and investments in real assets and royalty interests made through our natural resources strategy.

Equity Holdings

As of March 31, 2012, our equity investments consisted of (i) marketable equity securities (included in securities on our condensed consolidated balance sheet) with an aggregate cost amount of $5.3 million and estimated fair value of $6.5 million, (ii) private equity investments carried at cost (included in other assets on our condensed consolidated balance sheet) with an aggregate cost amount of $0.8 million and an estimated fair value of $0.9 million, and (iii) equity investments carried at estimated fair value, with an aggregate cost amount of $188.2 million and an estimated fair value of $203.6 million. Equity investments carried at estimated fair value primarily consist of private equity investments. In comparison, as of December 31, 2011, our equity investments consisted of (i) marketable equity securities (included in securities on our condensed consolidated balance sheet) with an aggregate cost amount of $12.8 million and estimated fair value of $13.2 million, (ii) private equity investments carried at cost (included in other assets on our condensed consolidated balance sheet) with both an aggregate cost amount and estimated fair value of $0.8 million, and (iii) equity investments, carried at estimated fair value, with an aggregate cost amount of $180.9 million and estimated fair value of $189.8 million.

Natural Resources Holdings

Our natural resources holdings include working interests in producing oil and natural gas fields located in Texas, Mississippi and Louisiana. As of March 31, 2012 and December 31, 2011, the working interests had a carrying value of $160.4 million and $86.9 million, respectively. These interests are in both proved developed and proved undeveloped properties, with the majority of our exposure to natural gas, followed by natural gas liquids and then oil. The acquisition of these working interests was partially financed with $66.8 million of borrowings through a five-year $137.2 million non-recourse, asset-based credit facility maturing November 5, 2015.

In addition to natural resources working interests, we own overriding royalty interests in acreage primarily in south Texas and other parts of the United States. The overriding royalty interests include producing oil and natural gas properties, but most of the acreage is still under development. The overriding royalty interest properties are operated by unaffiliated third parties and as of March 31, 2012 and December 31, 2011, had a carrying value of $50.7 million and $51.7 million, respectively.

Portfolio Purchases

We made investment portfolio purchases of $574.6 million during the three months ended March 31, 2012, as compared to $996.9 million for the three months ended March 31, 2011, primarily comprised of the following purchases by strategy. All amounts presented are on a trade date cost basis.

Portfolio Purchases

(Dollar amounts in thousands)

For the three months ended March 31, 2012	Bank Loans & High Yield			Natural Resources			Special Situations			Mezzanine			Private Equity			Total
Corporate loans	$	454,726		$	—		$	14,808		$	—		$	—		$	469,534
Securities	2,544			—			11,766			—			—			14,310
Equity investments, at estimated fair value(1)	1,882			1,151			228			—			5,000			8,261
Other assets(2)	—			76,631			5,907			—			—			82,538
Total	$	459,152		$	77,782		$	32,709		$	—		$	5,000		$	574,643
% of total	79.9		%	13.5		%	5.7		%	0.0		%	0.9		%	100.0		%

(1)Includes certain marketable equity securities and private equity investments, including bank loans and high yield debt securities which were restructured from debt instruments to equity, for which we elected the fair value option of accounting.

(2)Includes working interests and overriding royalty interests in oil and natural gas properties.

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For the three months ended March 31, 2011	Bank Loans & High Yield			Natural Resources			Special Situations			Mezzanine			Private Equity			Total
Corporate loans	$	835,591		$	—		$	25,971		$	9,847		$	—		$	871,409
Securities	43,271			—			6,642			—			—			49,913
Equity investments, at estimated fair value(1)	—			—			4,092			631			12,748			17,471
Other assets(2)	—			55,002			3,127			—			—			58,129
Total	$	878,862		$	55,002		$	39,832		$	10,478		$	12,748		$	996,922
% of total	88.1		%	5.5		%	4.0		%	1.1		%	1.3		%	100.0		%

(1)Includes certain marketable equity securities and private equity investments, including bank loans and high yield debt securities which were restructured from debt instruments to equity, for which we elected the fair value option of accounting.

(2)Includes working interests and overriding royalty interests in oil and natural gas properties.

Shareholders’ Equity

Our shareholders’ equity at March 31, 2012 and December 31, 2011 totaled $1.8 billion and $1.7 billion, respectively. Included in our shareholders’ equity as of March 31, 2012 and December 31, 2011 is accumulated other comprehensive loss totaling $3.4 million and $35.6 million, respectively.

Our average shareholders’ equity and return on average shareholders’ equity for the three months ended March 31, 2012 was $1.7 billion and 20.4%, respectively, and for the three months ended March 31, 2011 was $1.7 billion and 22.3%, respectively. Return on average shareholders’ equity is defined as net income divided by weighted average shareholders’ equity.

Our book value per share as of March 31, 2012 and December 31, 2011 was $9.81 and $9.41, respectively, and was computed based on 178,393,521 and 178,145,482 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively.

On February 2, 2012, our board of directors declared a cash distribution for the quarter ended December 31, 2011 of $0.18 per share to common shareholders of record on February 16, 2012. The distribution was paid on March 1, 2012. In addition, on February 2, 2012, our board of directors declared an annual special cash distribution for the year ended December 31, 2011 of $0.08 per share to common shareholders of record on March 15, 2012. The distribution was paid on March 29, 2012.

On April 24, 2012, our board of directors declared a cash distribution for the quarter ended March 31, 2012 of $0.18 per share to shareholders of record on May 8, 2012. The distribution is payable on May 22, 2012.

On March 1, 2012, we repurchased and cancelled 10,264 of our common shares in connection with the satisfaction of tax withholding obligations related to common shares previously awarded to certain of our officers and vesting on that date.

Liquidity and Capital Resources

We actively manage our liquidity position with the objective of preserving our ability to fund our operations and fulfill our commitments on a timely and cost-effective basis. Although we believe our current sources of liquidity are adequate to preserve our ability to fund our operations and fulfill our commitments, we will continue to evaluate opportunities to issue incremental capital. This may include taking advantage of market opportunities to issue equity or refinance or replace indebtedness, including the issuance of new debt securities and retiring debt pursuant to privately negotiated transactions, open market purchases or otherwise.

Our 7.0% convertible senior notes (the “7.0% Notes”) with $112.0 million principal amount outstanding as of March 31, 2012, mature in July 2012. During the first quarter of 2012, we repurchased $23.1 million par amount of our 7.0% Notes. These transactions resulted in us recording a loss of $0.4 million and an immaterial write-off of unamortized debt issuance costs. As of March 31, 2012, we had unrestricted cash and cash equivalents totaling $526.8 million, of which $112.0 million is expected to be used to redeem the principal amount outstanding of our 7.0% Notes. We believe if attractive market opportunities arise, we may raise capital either through debt or equity or a combination thereof to replace the funding represented by the 7.0% Notes.

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The majority of our investments are held in Cash Flow CLOs. Accordingly, the majority of our cash flows have historically been received from our investments in the mezzanine and subordinated notes of our Cash Flow CLOs. However, during the period in which a Cash Flow CLO is not in compliance with an over-collateralization (“OC Test”) as outlined in its respective indenture, the cash flows we would generally expect to receive from our Cash Flow CLO holdings are paid to the senior note holders of the Cash Flow CLOs. As of March 31, 2012, all our Cash Flow CLOs were in compliance with certain compliance tests (specifically, their respective OC Tests) and made cash distributions to mezzanine and/or subordinate note holders, including us.

On March 31, 2011, we closed CLO 2011-1, a $400.0 million secured financing transaction secured by the assets held in CLO 2011-1. At closing, we entered into a senior loan agreement (the “CLO 2011-1 Agreement”) through which CLO 2011-1 was able to borrow up to $300.0 million through a non-recourse loan secured by the assets held in CLO 2011-1. On July 6, 2011, we amended the CLO 2011-1 Agreement to upsize the transaction to $600.0 million, whereby CLO 2011-1 was able to borrow up to an additional $150.0 million, or total of $450.0 million. Under the amended CLO 2011-1 Agreement, the CLO 2011-1 senior loan matures on August 15, 2018 and borrowings under the CLO 2011-1 Agreement bear interest at a rate of the three-month LIBOR plus 1.35%. In addition, concurrent with the amendment to increase the size of CLO 2011-1, the transaction was amended to reduce the par value ratio test (“PVR Test”) from 133.33% to 120.0%. Under CLO 2011-1, if the PVR Test is below 120.0%, up to 50% of all interest collections that otherwise are payable to us are used to amortize the senior loan amount outstanding by the lower of the amount required to bring the PVR Test into compliance and the outstanding loan amount. Similarly, if the PVR Test is below 120.0%, the principal collections that otherwise would be payable to us are used to amortize the senior loan amount outstanding by the lower of the amount required to bring the PVR Test into compliance and the outstanding loan amount. Once the total portfolio held by CLO 2011-1 is reduced below 35% of the total committed transaction size, all principal proceeds received by CLO 2011-1 are used to amortize the senior loan. As of March 31, 2012, we had $431.4 million of borrowings outstanding under the CLO 2011-1 Agreement.

Sources of Funds

Senior Notes Offerings

On March 20, 2012, we issued $115.0 million par amount of 7.500% Senior Notes due March 20, 2042, resulting in net proceeds of $111.4 million. The 7.500% Senior Notes bear interest at a rate of 7.500% per year on the principal amount, accruing from March 20, 2012. Interest is payable quarterly in arrears on June 20, September 20, December 20 and March 20 of each year, beginning on June 20, 2012. The total net proceeds from this offering will be used for general corporate purposes.

On November 15, 2011, we issued $258.8 million par amount of 8.375% senior notes (“8.375% Senior Notes”) due November 15, 2041, resulting in net proceeds of $250.7 million. Interest on the 8.375% Senior Notes is paid quarterly in arrears on February 15, May 15, August 15 and November 15 of each year.

Cash Flow CLO Transactions

As of March 31, 2012, we had six Cash Flow CLO transactions outstanding. An affiliate of our Manager owns an interest in the junior secured notes of both CLO 2007-1 and CLO 2007-A. The aggregate carrying amount of the junior secured notes in CLO 2007-1 and CLO 2007-A held by the affiliate of our Manager was $347.9 million as of March 31, 2012 and is reflected as collateralized loan obligation junior secured notes to affiliates on our condensed consolidated balance sheets.

In accordance with GAAP, we consolidate each of our CLO subsidiaries as we have the power to direct the activities of these VIEs, as well as the obligation to absorb losses of the VIEs and the right to receive benefits of the VIEs that could potentially be significant to the VIEs. We utilize CLOs to fund our investments in corporate loans and corporate debt securities.

The indentures governing our Cash Flow CLOs include numerous compliance tests, the majority of which relate to the CLO’s portfolio.

For CLO 2011-1, which we closed on March 31, 2011, we receive all remaining interest collections on a quarterly basis after administrative expenses and interest expense on the senior loan are paid, unless the PVR Test is below 120.0%, in which case up to 50% of all interest collections that otherwise would be payable to us are used to amortize the senior loan amount outstanding by the lower of the amount required to bring the PVR Test into compliance and the outstanding loan amount. Similarly, 25% of all principal collections received by CLO 2011-1 are distributed to us unless the PVR Test is below 120.0%, in which case the principal collections that otherwise would be payable to us are used to amortize the senior loan amount outstanding by the lower of the amount required to bring the PVR Test into compliance and the outstanding loan amount. Once the total portfolio held by CLO 2011-1 is reduced below 35% of the total committed transaction size, all principal proceeds received by CLO 2011-1 are used to amortize the senior loan. For purposes of the calculation, collateral value is the par value of the assets unless an asset is in default or is a CCC-rated asset in excess of the CCC-rated asset limit percentage specified for CLO 2011-1, in which case the collateral value of such asset is the market value of such asset.

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The following table summarizes the PVR Test for CLO 2011-1. This information is based on the March 2012 monthly report which is prepared by the independent third party trustee for CLO 2011-1:

(dollar amounts in thousands)	CLO 2011-1
Portfolio total	$	508,404
Par value test minimum	120.0		%
Par value test ratio	133.3		%
Cushion / (Excess)	$	57,522
Par value portfolio collateral value	$	575,217
Outstanding loan balance	$	431,413

In the case of our other Cash Flow CLOs, which vary from CLO 2011-1’s compliance tests, in the event that a portfolio profile test is not met, the indenture places restrictions on the ability of the CLO’s manager to reinvest available principal proceeds generated by the collateral in the CLOs until the specific test has been cured. In addition to the portfolio profile tests, the indentures for these CLOs include OC Tests which set the ratio of the collateral value of the assets in the CLO to the tranches of debt for which the test is being measured, as well as interest coverage tests. For purposes of the calculation, collateral value is the par value of the assets unless an asset is in default, is a discounted obligation, or is a CCC-rated asset in excess of the percentage of CCC-rated asset limit specified for each CLO.

If an asset is in default, the indenture for each CLO transaction defines the value used to determine the collateral value, which is the lower of market value of the asset or the recovery value proscribed for the asset based on its type and rating by Standard & Poor’s or Moody’s.

A discount obligation is an asset with a purchase price of less than a particular percentage of par. The discount obligation amounts are specified in each CLO and are generally set at a purchase price of less than 80% of par for corporate loans and 75% of par for corporate debt securities.

The indenture for each CLO specifies a CCC-threshold for the percentage of total assets in the CLO that can be rated CCC. All assets in excess of the CCC threshold specified for the respective CLO are also included in the OC Tests at market value and not par.

Defaults of assets in CLOs, ratings downgrade of assets in CLOs to CCC, price declines of CCC assets in excess of the proscribed CCC threshold amount, and price declines in assets classified as discount obligations may reduce the over-collateralization ratio such that a CLO is not in compliance. If a CLO is not in compliance with an OC Test, cash flows normally payable to the holders of junior classes of notes will be used by the CLO to amortize the most senior class of notes until such point as the OC Test is brought back into compliance. While being out of compliance with an OC Test would not impact our investment portfolio or results of operations, it would impact our unrestricted cash flows available for operations, new investments and cash distributions. As of March 31, 2012, all of our CLOs were in compliance with their respective OC Tests. The following table summarizes several of the material tests and metrics for each of our CLOs. This information is based on the March 2012 monthly reports, which are prepared by the independent third party trustee for each CLO:

·Investments: The par value of the investments in each CLO plus principal cash in the CLO.

·Senior interest coverage (“IC”) ratio minimum: Minimum required ratio of interest income earned on investments to interest expense on the senior debt issued by the CLO per the respective CLO’s indenture.

·Actual senior IC ratio: The ratio is interest income earned on the investments divided by interest expense on the senior debt issued by the CLO.

·CCC amount: The par amount of assets rated CCC or below (excluding defaults, if any).

·CCC threshold percentage: Maximum amount of assets in portfolio that are rated CCC without being subject to being valued at fair value for purposes of the OC Tests.

·Senior OC Test minimum: Minimum senior over-collateralization requirement per the respective CLO’s indenture.

·Actual senior OC Test: Actual senior over-collateralization amount as of the March 2012 report date.

·Actual cushion / (excess): Dollar amount that over-collateralization test is being passed, cushion, or failed (excess).

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·Subordinated OC Test minimum: Minimum subordinated over-collateralization requirement per the respective CLO’s indenture.

·Actual subordinated OC Test: Actual subordinated over-collateralization amount as of the March 2012 report date.

·Subordinate cushion / (excess): Dollar amount that the OC Test is being passed, cushion, or failed (excess).

(dollar amounts in thousands)	CLO 2005-1			CLO 2005-2			CLO 2006-1			CLO 2007-1			CLO 2007-A
Investments	$	906,987		$	892,464		$	1,039,192		$	3,340,916		$	1,129,083
Senior IC ratio minimum	115.0		%	125.0		%	115.0		%	115.0		%	120.0		%
Actual senior IC ratio	471.8		%	640.4		%	232.1		%	724.0		%	478.8		%
CCC amount	$	84,432		$	103,807		$	185,948		$	636,677		$	211,400
CCC percentage of portfolio	9.3		%	11.6		%	17.9		%	19.1		%	18.7		%
CCC threshold percentage	5.0		%	7.5		%	7.5		%	7.5		%	7.5		%
Senior OC Test minimum	119.4		%	123.0		%	143.1		%	159.1		%	119.7		%
Actual senior OC Test	136.4		%	136.4		%	160.2		%	179.3		%	147.4		%
Cushion / (Excess)	$	108,406		$	86,097		$	103,944		$	359,154		$	199,635
Subordinated OC Test minimum	106.2		%	106.9		%	114.0		%	120.1		%	109.9		%
Actual subordinated OC Test	113.1		%	119.0		%	136.7		%	124.9		%	119.0		%
Cushion / (Excess)	$	53,313		$	88,779		$	161,965		$	122,438		$	81,350

During the first quarter of 2012, we issued $42.0 million par amount of CLO 2007-1 class D notes for proceeds of $31.9 million.

Credit Facilities

Senior Secured Credit Facility

We have available a $250.0 million asset-based revolving credit facility (the “2014 Facility”), maturing on May 3, 2014, that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified financial assets. The 2014 Facility bears interest at a rate equal to LIBOR plus 3.25% per annum and contains negative covenants that restrict our ability, among other things, to pay distributions or make certain other restricted payments, including a restriction from making distributions to holders of common shares in excess of 65% of our estimated annual taxable income calculated in accordance with the 2014 Facility credit agreement. In addition, no distributions shall be paid if a deficiency in the required collateral per the agreement exists or would exist as a result of such distributions. We may obtain additional commitments under the 2014 Facility so long as the aggregate amount of commitments at any time does not exceed $600.0 million.

As of March 31, 2012, we had no borrowings outstanding under the 2014 Facility.

Asset-Based Borrowing Facility

On January 31, 2012, we entered into an amendment to our credit agreement to further increase our five-year non-recourse, asset-based revolving credit facility (the “2015 Natural Resources Facility”), maturing on November 5, 2015, from $81.1 million to $137.2 million, that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified oil and gas assets. The borrowing base is subject to certain caps and concentration limits customary for financings of this type. We have the right to prepay loans under the 2015 Natural Resources Facility in whole or in part at any time. Loans under the 2015 Natural Resources Facility bear interest at a rate equal to LIBOR plus a tiered applicable margin ranging from 1.75% to 2.75% per annum. The 2015 Natural Resources Facility contains customary covenants applicable to us.

As of March 31, 2012, we had $66.8 million of borrowings outstanding under the 2015 Natural Resources Facility. In addition, under the 2015 Natural Resources Facility, we had a letter of credit outstanding totaling $1.0 million.

As of March 31, 2012, we believe we were in compliance with the covenant requirements for both credit facilities above.

Convertible Debt

In 2010, we issued $172.5 million of 7.5% convertible senior notes due January 15, 2017 (the “7.5% Notes”). The 7.5% Notes will mature on January 15, 2017 unless previously redeemed, repurchased or converted in accordance with their terms prior to such date. Holders of the 7.5% Notes may convert their notes at the applicable conversion rate at any time prior to the close of business on the business day immediately preceding the stated maturity date subject to our right to terminate the conversion rights of the notes. We may satisfy our obligation with respect to the 7.5% Notes tendered for conversion by delivering to the holder either cash, common shares, no par value, issued by us or a combination thereof. As of March 31, 2012, the conversion rate for each $1,000 principal amount of 7.5% Notes was 135.2005 common shares, which is equivalent to a conversion price of approximately $7.40 per common share.

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During 2012, we repurchased $23.1 million par amount of our 7.0% Notes. These transactions resulted in us recording a loss of $0.4 million and an immaterial write-off of unamortized debt issuance costs. During 2011, we repurchased $45.5 million par amount of our 7.0% Notes, which resulted in us recording a loss of $1.7 million and a write-off of $0.1 million of unamortized debt issuance costs. As of March 31, 2012, the conversion rate for each $1,000 principal amount of the notes was 32.2581, which is equivalent to a conversion price of approximately $31.00 per common share.

Off-Balance Sheet Commitments

As of March 31, 2012, we had committed to purchase corporate loans with aggregate commitments totaling $284.3 million. In addition, we participate in certain financing arrangements, whereby we are committed to provide funding of up to a specific predetermined amount at the discretion of the borrower or have entered into an agreement to acquire interests in certain assets. As of March 31, 2012, we had unfunded financing commitments totaling $7.4 million for corporate loans and approximately $204.7 million for other assets, including equity investments, at estimated fair value and working and overriding royalty interests in oil and gas properties. We do not expect material losses related to the assets for which we commit to purchase and fund.

Partnership Tax Matters

Non-Cash “Phantom” Taxable Income

We intend to continue to operate so that we qualify, for United States federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. Holders of our shares are subject to United States federal income taxation and generally other taxes, such as state, local and foreign income taxes, on their allocable share of our taxable income, regardless of whether or when they receive cash distributions. In addition, certain of our investments, including investments in foreign corporate subsidiaries, CLO issuers (which are treated as partnerships or disregarded entities for United States federal income tax purposes) and debt securities, may produce taxable income without corresponding distributions of cash to us or may produce taxable income prior to or following the receipt of cash relating to such income. In addition, we have recognized and may recognize in the future cancellation of indebtedness income upon the retirement of our debt at a discount. Consequently, in some taxable years, holders of our shares may recognize taxable income in excess of our cash distributions. Furthermore, even if we did not pay cash distributions with respect to a taxable year, holders of our shares may still have a tax liability attributable to their allocation of taxable income from us during such year.

Qualifying Income Exception

We intend to continue to operate so as to qualify, for United States federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. In general, if a partnership is “publicly traded” (as defined in the Internal Revenue Code of 1986, as amended (the “Code”)), it will be treated as a corporation for United States federal income tax purposes. A publicly traded partnership will be taxed as a partnership, however, and not as a corporation, for United States federal income tax purposes so long as it is not required to register under the Investment Company Act of 1940 (the “Investment Company Act”) and at least 90% of its gross income for each taxable year constitutes “qualifying income” within the meaning of Section 7704(d) of the Code. We refer to this exception as the “qualifying income exception.” Qualifying income generally includes rents, dividends, interest (to the extent such interest is neither derived from the “conduct of a financial or insurance business” nor based, directly or indirectly, upon “income or profits” of any person), income and gains derived from certain activities related to minerals and natural resources, and capital gains from the sale or other disposition of stocks, bonds and real property. Qualifying income also includes other income derived from the business of investing in, among other things, stocks and securities.

If we fail to satisfy the “qualifying income exception” described above, items of income, gain, loss, deduction and credit would not pass through to holders of our shares and such holders would be treated for United States federal (and certain state and local) income tax purposes as shareholders in a corporation. In such case, we would be required to pay income tax at regular corporate rates on all of our income. In addition, we would likely be liable for state and local income and/or franchise taxes on all of our income. Distributions to holders of our shares would constitute ordinary dividend income taxable to such holders to the extent of our earnings and profits, and these distributions would not be deductible by us. If we were taxable as a corporation, it could result in a material reduction in cash flow and after-tax return for holders of our shares and thus could result in a substantial reduction in the value of our shares and any other securities we may issue.

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Tax Consequences of Investments in Natural Resources

As referenced above, we have made and may make certain investments in natural resources. It is likely that the income from such investments will be treated as effectively connected with the conduct of a United States trade or business with respect to holders of our shares that are not “United States persons” within the meaning of Section 7701(a)(30) of the Code. Furthermore, any notional principal contracts that we enter into, if any, in connection with investments in natural resources likely would generate income that would be treated as effectively connected income with the conduct of a United States trade or business. To the extent our income is treated as effectively connected income, a holder who is a non-United States person generally would be required to (i) file a United States federal income tax return for such year reporting its allocable share, if any, of our income or loss effectively connected with such trade or business and (ii) pay United States federal income tax at regular United States tax rates on any such income. Moreover, if such a holder is a corporation, it might be subject to a United States branch profits tax on its allocable share of our effectively connected income. In addition, distributions to such a holder would be subject to withholding at the highest applicable tax rate to the extent of the holder’s allocable share of our effectively connected income. Any amount so withheld would be creditable against such holder’s United States federal income tax liability, and such holder could claim a refund to the extent that the amount withheld exceeded such holder’s United States federal income tax liability for the taxable year. Finally, if we are engaged in a United States trade or business, a portion of any gain recognized by an investor who is a non-United States person on the sale or exchange of its shares may be treated for United States federal income tax purposes as effectively connected income, and hence such holder may be subject to United States federal income tax on the sale or exchange.

In addition, for all of our holders, investments in natural resources would likely constitute doing business in the jurisdictions in which such assets are located. As a result, holders of our shares will likely be required to file foreign, state and local income tax returns and pay foreign, state and local income taxes in some or all of these various jurisdictions. Further, holders may be subject to penalties if they fail to comply with those requirements.

Our Investment Company Act Status

Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is, holds itself out as being, or proposes to be, primarily engaged in the business of investing, reinvesting or trading in securities and Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” (within the meaning of the Investment Company Act) having a value exceeding 40% of the value of the issuer’s total assets (exclusive of United States government securities and cash items) on an unconsolidated basis (the “40% test”). Excluded from the term “investment securities” are, among others, securities issued by majority-owned subsidiaries unless the subsidiary is an investment company or relies on the exceptions from the definition of an investment company provided by Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act (a “fund”).

We are organized as a holding company. We conduct our operations primarily through our majority-owned subsidiaries. Each of our subsidiaries is either outside of the definition of an investment company in Sections 3(a)(1)(A) and 3(a)(1)(C), described above, or excepted from the definition of an investment company under the Investment Company Act. We believe that we are not, and that we do not propose to be, primarily engaged in the business of investing, reinvesting or trading in securities and we do not believe that we have held ourselves out as such. We intend to continue to conduct our operations so that we are not required to register as an investment company under the Investment Company Act.

We monitor our holdings regularly to confirm our continued compliance with the 40% test. In calculating our position under the 40% test, we are responsible for determining whether any of our subsidiaries is majority-owned. We treat as majority-owned subsidiaries for purposes of the 40% test entities, including those that issue CLOs, in which we own at least 50% of the outstanding voting securities or that are otherwise structured consistent with applicable SEC staff guidance. Some of our subsidiaries may rely solely on the exceptions from the definition of “investment company” found in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. In order for us to satisfy the 40% test, our ownership interests in those subsidiaries or any of our subsidiaries that are not majority-owned for purposes of the Investment Company Act, together with any other “investment securities” that we may own, may not have a combined value in excess of 40% of the value of our total assets on an unconsolidated basis and exclusive of United States government securities and cash items. However, many of our subsidiaries either fall outside of the general definitions of an investment company or rely on exceptions provided by provisions of, and rules and regulations promulgated under, the Investment Company Act (other than Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act) and, therefore, the securities of those subsidiaries that we own and hold are not investment securities for purposes of the Investment Company Act. In order to conform to these exceptions, these subsidiaries are limited with respect to the assets in which each of them can invest and/or the types of securities each of them may issue. We must, therefore, monitor each subsidiary’s compliance with its applicable exception and our freedom of action relating to such a subsidiary, and that of the subsidiary itself, may be limited as a result. For example, our subsidiaries that issue CLOs generally rely on the exception provided by Rule 3a-7 under the Investment Company Act, while KKR Financial Holdings II, LLC (“KFH II”), our subsidiary that is taxed as a real estate investment trust (a “REIT”) for United States federal income tax purposes, generally relies on the exception provided by Section 3(c)(5)(C) of the Investment Company Act. Each of these exceptions requires, among other things that the subsidiary (i) not issue redeemable securities and (ii) engage in the business of holding certain types of assets, consistent with the terms of the exception. Similarly, any subsidiaries engaged in the ownership of oil and gas assets may, depending on the nature of the assets, be outside the definition of an investment company or rely on exceptions provided by Section 3(c)(5)(C) or Section 3(c)(9) of the Investment Company Act. While Section 3(c)(9) of the Investment Company Act does not limit the nature of the securities issued, it does impose business engagement requirements that limit the types of assets that may be held.

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We do not treat our interests in majority-owned subsidiaries that are outside of the general definition of an investment company or that rely on Section 3(c)(5)(C) or Section 3(c)(9) of, or Rule 3a-7 under, the Investment Company Act as investment securities when calculating our 40% test.

We sometimes refer to our subsidiaries that rely on Rule 3a-7 under the Investment Company Act as “CLO subsidiaries.” Rule 3a-7 under the Investment Company Act is available to certain structured financing vehicles that are engaged in the business of holding financial assets that, by their terms, convert into cash within a finite time period and that issue fixed income securities entitling holders to receive payments that depend primarily on the cash flows from these assets, provided that, among other things, the structured finance vehicle does not engage in certain portfolio management practices resembling those employed by management investment companies (e.g., mutual funds). Accordingly, each of these CLO subsidiaries is subject to an indenture (or similar transaction documents) that contains specific guidelines and restrictions limiting the discretion of the CLO subsidiary and its collateral manager. In particular, these guidelines and restrictions prohibit the CLO subsidiary from acquiring and disposing of assets primarily for the purpose of recognizing gains or decreasing losses resulting from market value changes. Thus, a CLO subsidiary cannot acquire or dispose of assets primarily to enhance returns to the owner of the equity in the CLO subsidiary; however, subject to this limitation, sales and purchases of assets may be made so long as doing so does not violate guidelines contained in the CLO subsidiary’s relevant transaction documents. A CLO subsidiary generally can, for example, sell an asset if the collateral manager believes that its credit quality has declined since its acquisition or that the credit profile of the obligor will deteriorate and the proceeds of permitted dispositions may be reinvested in additional collateral, subject to fulfilling the requirements set forth in Rule 3a-7 under the Investment Company Act and the CLO subsidiary’s relevant transaction documents. As a result of these restrictions, our CLO subsidiaries may suffer losses on their assets and we may suffer losses on our investments in those CLO subsidiaries.

We sometimes refer to KFH II, our subsidiary that relies on Section 3(c)(5)(C) of the Investment Company Act, as our “REIT subsidiary.” Section 3(c)(5)(C) of the Investment Company Act is available to companies that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. While the SEC has not promulgated rules to address precisely what is required for a company to be considered to be “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate,” the SEC’s Division of Investment Management, or the “Division,” has taken the position, through a series of no-action and interpretive letters, that a company may rely on Section 3(c)(5)(C) of the Investment Company Act if, among other things, at least 55% of the company’s assets consist of mortgage loans, other assets that are considered the functional equivalent of mortgage loans and certain other interests in real property (collectively, “qualifying real estate assets”), and at least 25% of the company’s assets consist of real estate-related assets (reduced by the excess of the company’s qualifying real estate assets over the required 55%), leaving no more than 20% of the company’s assets to be invested in miscellaneous assets. The Division has also provided guidance as to the types of assets that can be considered qualifying real estate assets. Because the Division’s interpretive letters are not binding except as they relate to the companies to whom they are addressed, if the Division were to change its position as to, among other things, what assets might constitute qualifying real estate assets our REIT subsidiary might be required to change its investment strategy to comply with the changed position. We cannot predict whether such a change would be adverse.

Based on current guidance, our REIT subsidiary classifies investments in mortgage loans as qualifying real estate assets, as long as the loans are “fully secured” by an interest in real estate on which we retain the unilateral right to foreclose. That is, if the loan-to-value ratio of the loan is equal to or less than 100%, then the mortgage loan is considered to be a qualifying real estate asset. Mortgage loans with loan-to-value ratios in excess of 100% are considered to be only real estate-related assets. Our REIT subsidiary considers agency whole pool certificates to be qualifying real estate assets. Examples of agencies that issue whole pool certificates are the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. An agency whole pool certificate is a certificate issued or guaranteed as to principal and interest by the United States government or by a federally chartered entity, which represents the entire beneficial interest in the underlying pool of mortgage loans. By contrast, an agency certificate that represents less than the entire beneficial interest in the underlying mortgage loans is not considered to be a qualifying real estate asset, but is considered by our REIT subsidiary to be a real estate-related asset.

Most non-agency mortgage-backed securities do not constitute qualifying real estate assets because they represent less than the entire beneficial interest in the related pool of mortgage loans; however, based on Division guidance, where our REIT subsidiary’s investment in non-agency mortgage-backed securities is the “functional equivalent” of owning the underlying mortgage loans, our REIT subsidiary may treat those securities as qualifying real estate assets. Moreover, investments in mortgage-backed securities that do not constitute qualifying real estate assets are classified by our REIT subsidiary as real estate-related assets. Therefore, based upon the specific terms and circumstances related to each non-agency mortgage-backed security that our REIT subsidiary owns, our REIT subsidiary will make a determination of whether that security should be classified as a qualifying real estate asset or as a real estate-related asset; and there may be instances where a security is recharacterized from being a qualifying real estate asset to a real

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estate-related asset, or conversely, from being a real estate-related asset to being a qualifying real estate asset based upon the acquisition or disposition or redemption of related classes of securities from the same securitization trust. If our REIT subsidiary acquires securities that, collectively, receive all of the principal and interest paid on the related pool of underlying mortgage loans (less fees, such as servicing and trustee fees, and expenses of the securitization), and that subsidiary has unilateral foreclosure rights with respect to those mortgage loans, then our REIT subsidiary will consider those securities, collectively, to be qualifying real estate assets. If another entity acquires any of the securities that are expected to receive cash flow from the underlying mortgage loans, then our REIT subsidiary will consider whether it has appropriate foreclosure rights with respect to the underlying loans and whether its investment is a first loss position in deciding whether these securities should be classified as qualifying real estate assets. If our REIT subsidiary owns more than one subordinate class, then, to determine the classification of subordinate classes other than the first loss class, our REIT subsidiary will consider whether such classes are contiguous with the first loss class (with no other classes absorbing losses after the first loss class and before any other subordinate classes that our REIT subsidiary owns), whether our REIT subsidiary owns the entire amount of each such class and whether our REIT subsidiary would continue to have appropriate foreclosure rights in connection with each such class if the more subordinate classes were no longer outstanding. If the answers to any of these questions is no, then our REIT subsidiary would expect not to classify that particular class, or classes senior to that class, as qualifying real estate assets.

We have made or may make oil and gas and other mineral investments that are held through one or more subsidiaries and would refer to those subsidiaries as our “Oil and Gas Subsidiaries”. Depending upon the nature of the oil and gas assets held by an Oil and Gas Subsidiary, such Oil and Gas Subsidiary may rely on Section 3(c)(5)(C) or Section 3(c)(9) of the Investment Company Act or may fall outside of the general definition of an investment company. An Oil and Gas Subsidiary that does not engage primarily, propose to engage primarily or hold itself out as engaging primarily in the business of investing, reinvesting or trading in securities will be outside of the general definition of an investment company provided that it passes the 40% test. This may be the case where an Oil and Gas Subsidiary holds a sufficient amount of oil and gas assets constituting real estate interests together with other assets that are not investment securities such as equipment. Oil and Gas Subsidiaries that hold oil and gas assets that constitute real property interests, but are unable to pass the 40% test, may rely on Section 3(c)(5)(C), subject to the requirements and restrictions described above. Alternately, an Oil and Gas Subsidiary may rely on Section 3(c)(9) of the Investment Company Act if substantially all of its business consists of owning or holding oil, gas or other mineral royalties or leases, certain fractional interests, or certificates of interest or participations in or investment contracts relating to such royalties, leases or fractional interests. These various restrictions imposed on our Oil and Gas Subsidiaries by the Investment Company Act may have the effect of limiting our freedom of action with respect to oil and gas assets (or other assets) that may be held or acquired by such subsidiary or the manner in which we may deal in such assets.

As noted above, if the combined values of the securities issued to us by our subsidiaries that must rely on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, exceed 40% of the value of our total assets (exclusive of United States government securities and cash items) on an unconsolidated basis, we may be deemed to be an investment company. If we fail to maintain an exception, exemption or other exclusion from the Investment Company Act, we could, among other things, be required either (i) to change substantially the manner in which we conduct our operations to avoid being subject to the Investment Company Act or (ii) to register as an investment company. Either of these would likely have a material adverse effect on us, the type of investments we make, our ability to service our indebtedness and to make distributions on our shares, and on the market price of our shares and any other securities we may issue. If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with certain affiliated persons (within the meaning of the Investment Company Act), portfolio composition (including restrictions with respect to diversification and industry concentration) and other matters. Additionally, our Manager would have the right to terminate our Management Agreement. Moreover, if we were required to register as an investment company, we would no longer be eligible to be treated as a partnership for United States federal income tax purposes. Instead, we would be classified as a corporation for tax purposes and would be able to avoid corporate taxation only to the extent that we were able to elect and qualify as a regulated investment company (“RIC”) under applicable tax rules. Because our eligibility for RIC status would depend on our assets and sources of income at the time that we were required to register as an investment company, there can be no assurance that we would be able to qualify as a RIC. If we were to lose partnership status and fail to qualify as a RIC, we would be taxed as a regular corporation. See “Partnership Tax Matters—Qualifying Income Exception”.

63

We have not requested approval or guidance from the SEC or its staff with respect to our Investment Company Act determinations, including, in particular: our treatment of any subsidiary as majority-owned; the compliance of any subsidiary with Section 3(c)(5)(C) or Section 3(c)(9) of, or Rule 3a-7 under, the Investment Company Act, including any subsidiary’s determinations with respect to the consistency of its assets or operations with the requirements thereof; or whether our interests in one or more subsidiaries constitute investment securities for purposes of the 40% test. If the SEC were to disagree with our treatment of one or more subsidiaries as being excepted from the Investment Company Act pursuant to Rule 3a-7, Section 3(c)(5)(C), Section 3(c)(9) or any other exception, with our determination that one or more of our other holdings do not constitute investment securities for purposes of the 40% test, or with our determinations as to the nature of the business in which we engage or the manner in which we hold ourselves out, we and/or one or more of our subsidiaries would need to adjust our operating strategies or assets in order for us to continue to pass the 40% test or register as an investment company, either of which could have a material adverse effect on us. Moreover, we may be required to adjust our operating strategy and holdings, or to effect sales of our assets in a manner that, or at a time or price at which, we would not otherwise choose, if there are changes in the laws or rules governing our Investment Company Act status or that of our subsidiaries, or if the SEC or its staff provides more specific or different guidance regarding the application of relevant provisions of, and rules under, the Investment Company Act. The SEC published on August 31, 2011 an advance notice of proposed rulemaking to potentially amend the conditions for reliance on Rule 3a-7 and the treatment of asset-backed issuers that rely on Rule 3a-7 under the Investment Company Act (the “3a-7 Release”). The SEC, in the 3a-7 Release, requested public comment on the nature and operation of issuers that rely on Rule 3a-7 and indicated various steps it may consider taking in connection with Rule 3a-7, although it did not formally propose any changes to the rule. Among the issues for which the SEC has requested comment in the 3a-7 Release is whether Rule 3a-7 should be modified so that parent companies of subsidiaries that rely on Rule 3a-7 should treat their interests in such subsidiaries as investment securities for purposes of the 40% test. The SEC also published on August 31, 2011 a concept release seeking information about the nature of entities that invest in mortgages and mortgage-related pools and public comment on how the SEC staff’s interpretive positions in connection with Section 3(c)(5)(C) affect these entities, although it did not propose any new interpretive positions or changes to existing interpretive positions in connection with Section 3(c)(5)(C). Any guidance or action from the SEC or its staff, including changes that the SEC may ultimately propose and adopt to the way Rule 3a-7 applies to entities or new or modified interpretive positions related to Section 3(c)(5)(C), could further inhibit our ability, or the ability of a subsidiary, to pursue our current or future operating strategies, which could have a material adverse effect on us.

If the SEC or a court of competent jurisdiction were to find that we were required, but failed, to register as an investment company in violation of the Investment Company Act, we would have to cease business activities, we would breach representations and warranties and/or be in default as to certain of our contracts and obligations, civil or criminal actions could be brought against us, our contracts would be unenforceable unless a court were to require enforcement and a court could appoint a receiver to take control of us and liquidate our business, any or all of which would have a material adverse effect on our business.

Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risks

From time to time, we may make investments that are denominated in a foreign currency through which we may be subject to foreign currency exchange risk. As of March 31, 2012, $313.7 million par amount, or 4.3%, of our corporate debt portfolio was denominated in foreign currencies, of which 71.9% was denominated in euros. In addition, as of March 31, 2012, $67.3 million par amount, or 35.7%, of our equity investments at estimated fair value was denominated in foreign currencies, of which 48.2% was denominated in Canadian dollars.

Based on these investments, we are exposed to movements in foreign currency exchange rates which may impact earnings if the United States dollar significantly strengthens or weakens against foreign currencies. Accordingly, we may use derivative instruments from time to time, including foreign exchange options and forward contracts, to manage the impact of fluctuations in foreign currency exchange rates.

Credit Spread Exposure

Our investments are subject to spread risk. Our investments in floating rate loans and securities are valued based on a market credit spread over LIBOR and for which the value is affected by changes in the market credit spreads over LIBOR. Our investments in fixed rate loans and securities are valued based on a market credit spread over the rate payable on fixed rate United States Treasuries of like maturity. Increased credit spreads, or credit spread widening, will have an adverse impact on the value of our investments while decreased credit spreads, or credit spread tightening, will have a positive impact on the value of our investments. However, tightening credit spreads will increase the likelihood that certain holdings will be refinanced at lower rates that would negatively impact our earnings.

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Interest Rate Risk

Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in repricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows and the prepayment rates experienced on our investments that have embedded borrower optionality. The objective of interest rate risk management is to achieve earnings, preserve capital and achieve liquidity by minimizing the negative impacts of changing interest rates, asset and liability mix, and prepayment activity.

We are exposed to basis risk between our investments and our borrowings. Interest rates on our floating rate investments and our variable rate borrowings do not reset on the same day or with the same frequency and, as a result, we are exposed to basis risk with respect to index reset frequency. Our floating rate investments may reprice on indices that are different than the indices that are used to price our variable rate borrowings and, as a result, we are exposed to basis risk with respect to repricing index. The basis risks noted above, in addition to other forms of basis risk that exist between our investments and borrowings, may be material and could negatively impact future net interest margins.

Interest rate risk impacts our interest income, interest expense, prepayments, as well as the fair value of our investments, interest rate derivatives and liabilities. We generally fund our variable rate investments with variable rate borrowings with similar interest rate reset frequencies. As of March 31, 2012, approximately 33.5% of our corporate debt portfolio had LIBOR floors with a weighted average floor of 1.4%. Based on our variable rate investments and variable rate borrowings as of March 31, 2012, we estimated that net interest income would be negatively impacted by approximately $8.6 million annually in the event interest rates were to increase by 1% and would be positively impacted by approximately $19.9 million annually in the event rates were to increase by 3%.

We manage our interest rate risk using various techniques ranging from the purchase of floating rate investments to the use of interest rate derivatives. The use of interest rate derivatives is a component of our interest risk management strategy. The contractual notional balance of our amortizing interest rate swaps was $508.3 million as of March 31, 2012.

Derivative Risk

Derivative transactions including engaging in swaps and foreign currency transactions are subject to certain risks. There is no guarantee that a company can eliminate its exposure under an outstanding swap agreement by entering into an offsetting swap agreement with the same or another party. Also, there is a possibility of default of the other party to the transaction or illiquidity of the derivative instrument. Furthermore, the ability to successfully use derivative transactions depends on the ability to predict market movements which cannot be guaranteed. As such, participation in derivative instruments may result in greater losses as we would have to sell or purchase an investment at inopportune times for prices other than current market prices or may force us to hold an asset we might otherwise have sold. In addition, as certain derivative instruments are unregulated, they are difficult to value and are therefore susceptible to liquidity and credit risks.

Collateral posting requirements are individually negotiated between counterparties and there is no regulatory requirement concerning the amount of collateral that a counterparty must post to secure its obligations under certain derivative instruments. Because they are unregulated, there is no requirement that parties to a contract be informed in advance when a credit default swap is sold. As a result, investors may have difficulty identifying the party responsible for payment of their claims. If a counterparty’s credit becomes significantly impaired, multiple requests for collateral posting in a short period of time could increase the risk that we may not receive adequate collateral. Amounts paid by us as premiums and cash or other assets held in margin accounts with respect to derivative instruments are not available for investment purposes.

The following table summarizes the estimated net fair value of our derivative instruments held at March 31, 2012 (amounts in thousands):

	As ofMarch 31, 2012
	Notional			Estimated Fair Value
Cash Flow Hedges:
Interest rate swaps	$	508,333		$	(86,052	)
Free-Standing Derivatives:
Commodity swaps	—			11,167
Credit default swaps—protection sold	13,500			116
Credit default swaps—protection purchased	(51,476		)	345
Total rate of return swaps	—			293
Foreign exchange forward contracts	(238,294		)	(18,147		)
Foreign exchange options	130,207			12,155
Common stock warrants	—			3,068
Total	$	362,270		$	(77,055	)

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For our derivatives, our credit exposure is directly with our counterparties and continues until the maturity or termination of such contracts. The following table sets forth the fair values of our primary derivative investments by remaining contractual maturity as of March 31, 2012 (amounts in thousands):

	Less than 1 year			1 - 3 years			3 - 5 years			More than 5 years			Total
Cash Flow Hedges:
Cash flow interest rate swaps	$	(2,779	)	$	—		$	—		$	(83,273	)	$	(86,052	)
Free-Standing Derivatives:
Commodity swaps	4,753			4,890			1,524			—			11,167
Credit default swaps—protection sold	116			—			—			—			116
Credit default swaps—protection purchased	(42		)	—			—			387			345
Total rate of return swaps	293			—			—			—			293
Foreign exchange forward contracts	57			(18,092		)	(112		)	—			(18,147		)
Foreign exchange options	—			12,155			—			—			12,155
Total	$	2,398		$	(1,047	)	$	1,412		$	(82,886	)	$	(80,123	)

Commodity Price Risk

Certain of our natural resources holdings, including our working interests in producing oil and natural gas fields are subject to fluctuations in the prices of natural gas, natural gas liquids and oil. Changes in the prices of natural gas, natural gas liquids and oil may cause our revenues and cash flows to be volatile. We have used, and expect to continue to use, commodity derivative contracts to minimize our exposure to fluctuations in these prices.

We have entered into commodity derivative contracts, consisting of oil, natural gas and certain natural gas liquid products receive-fixed, pay-floating swaps for certain years through 2016. We currently maintain derivative contracts for a significant portion of our oil and natural gas production. Given that we do not designate any of these contracts as cash flow hedges, the changes in fair value of these instruments are recorded in current period earnings. For the three months ended March 31, 2012, we had $0.9 million of commodity derivatives settlements, which are settled monthly. The estimated fair value of our commodity swaps as of March 31, 2012 totaled $11.2 million. As a significant portion of our commodity derivatives hedge the majority of our estimated natural gas production through 2015, a 40% decrease in the future prices of natural gas as compared to the future prices at March 31, 2012 would result in an estimated unhedged production value decrease of less than $1.5 million for any year through 2015.

Counterparty Risk

We have credit risks that are generally related to the counterparties with which we do business. If a counterparty becomes bankrupt, or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding. These risks of non-performance may differ from risks associated with exchange-traded transactions which are typically backed by guarantees and have daily mark-to-market and settlement positions. Transactions entered into directly between parties do not benefit from such protections and thus, are subject to counterparty default. It may be the case where any cash or collateral we pledged to the counterparty may be unrecoverable and we may be forced to unwind our derivative agreements at a loss. We may obtain only a limited recovery or may obtain no recovery in such circumstances, thereby reducing liquidity and earnings.

Management Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Significant estimates, assumptions and judgments are applied in situations including the determination of our allowance for loan losses and the valuation of certain investments. We revise our estimates when appropriate. However, actual results could materially differ from management’s estimates.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

See discussion of quantitative and qualitative disclosures about market risk in “Quantitative and Qualitative Disclosures About Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 4.  Controls and Procedures

The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2012. Based on their evaluation, the Company’s principal executive and principal financial officer concluded that the Company’s disclosure controls and procedures as of March 31, 2012 were designed and were functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ending March 31, 2012, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on February 28, 2012, which is accessible on the Securities and Exchange Commission’s website at www.sec.gov.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On January 15, 2012, our non-employee directors deferred an immaterial amount of cash compensation in exchange for 5,098  phantom shares pursuant to the KKR Financial Holdings LLC Non-Employee Directors’ Deferred Compensation and Share Award Plan. During March 2012, our non-employee directors deferred an immaterial amount of cash distribution in exchange for 5,380  phantom shares pursuant to the KKR Financial Holdings LLC Non-Employee Directors’ Deferred Compensation and Share Award Plan. Each phantom share is the economic equivalent of one of our common shares. The phantom shares become payable, in cash or common shares, at our election, upon the earlier of (i) the first day of January following the applicable non-employee director’s termination of service as a director or (ii) an election date pre-selected by the applicable non-employee director, and in any event in cash or common shares, at the election of the applicable non-employee director, upon the occurrence of a change in control of us. The grants made to our non-employee directors were exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof.

On January 17, 2012, the Compensation Committee of the board of directors granted the Manager 258,303 restricted common shares subject to graded vesting over three years with the final vesting date of March 1, 2015. The grant made to our Manager was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof.

67

Repurchases of Equity Securities

In March 2012, in privately negotiated transactions, we repurchased common shares previously awarded to certain of our officers by our Manager. During the quarter ended March 31, 2012, we did not have any publicly announced plans or programs to repurchase shares.

The following table sets forth information with respect to repurchases of our shares made during the quarter ended March 31, 2012:

	Total Number of Shares Repurchased	Average Price Paid per Share		Total Number of Shares Repurchased Under Publicly Announced Plans  or Programs	Approximate Dollar Value of Shares that May Yet Be Repurchased Under the Plans or Programs
January 1, 2012 through January 31, 2012	—	$	—	—	$	—
February 1, 2012 through February 29, 2012	—	—		—	—
March 1, 2012 through March 31, 2012	10,264	9.35		—	—
Total	10,264			—	$	—

For a further description of our share repurchases see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Shareholders’ Equity” in Item 2 of this Quarterly Report on Form 10-Q.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit
Number	Description
4.11	Supplemental Indenture, dated as of March 20, 2012, between the Registrant and Wilmington Trust, National Association and Citibank, N.A. (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K (File No. 001-33437) dated March 20, 2012)
4.12	Form of 7.500% Senior Note due March 20, 2042 (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K (File No. 001-33437) dated March 20, 2012)
31.1	Chief Executive Officer Certification
31.2	Chief Financial Officer Certification
32	Certification Pursuant to 18 U.S.C. Section 1350
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, KKR Financial Holdings LLC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	KKR Financial Holdings LLC
Signature	Title
/s/ WILLIAM C. SONNEBORN	Chief Executive Officer (Principal Executive Officer)
William C. Sonneborn
/s/ MICHAEL R. MCFERRAN	Chief Financial Officer (Principal Financial and Accounting
Michael R. McFerran	Officer)
Date: May 9, 2012

EX-31.1

Exhibit 31.1

Certification

I, William C. Sonneborn, certify that:

1.I have reviewed this quarterly report on Form 10-Q for the quarter ended March 31, 2012 of KKR Financial Holdings LLC;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: May 9, 2012
	/s/ WILLIAM C. SONNEBORN
	William C. Sonneborn
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification

I, Michael R. McFerran, certify that:

1.I have reviewed this quarterly report on Form 10-Q for the quarter ended March 31, 2012 of KKR Financial Holdings LLC;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: May 9, 2012
	/s/ MICHAEL R. MCFERRAN
	Michael R. McFerran
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

In connection with the Quarterly Report of KKR Financial Holdings LLC (the “Company”) on Form 10-Q for the period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), William C. Sonneborn, Chief Executive Officer of the Company, and Michael R. McFerran, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

May 9, 2012
	/s/ WILLIAM C. SONNEBORN
	William C. Sonneborn
	Chief Executive Officer
	(Principal Executive Officer)
	/s/ MICHAEL R. MCFERRAN
	Michael R. McFerran
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

XML

Corporate Loans and Allowance for Loan Losses (Details 3) (USD $)	3 Months Ended		12 Months Ended
	Mar. 31, 2012 Issuer	Mar. 31, 2011	Dec. 31, 2011 Issuer
Recorded investment in impaired loans and related allowances for credit losses
Number of issuers of loans related to the aggregate allowance on impaired loans	5		5
Recorded Investment	$ 69,028,000		$ 68,692,000
Unpaid Principal Balance	84,005,000		83,452,000
Related Allowance	34,456,000		33,836,000
Average Recorded Investment	68,860,000		80,177,000
Interest Income Recognized	803,000		2,645,000
Recorded investment with nonaccrual status	169,319,000		168,691,000
Interest income recognized using cash basis method	4,400,000	4,000,000
Corporate Loans Held for Investment
Recorded investment in impaired loans and related allowances for credit losses
Recorded investment with nonaccrual status	69,028,000		68,692,000
Interest income recognized using cash basis method	800,000	400,000
Corporate Loans Held for Sale
Recorded investment in impaired loans and related allowances for credit losses
Recorded investment with nonaccrual status	100,291,000		99,999,000
Interest income recognized using cash basis method	3,600,000	3,600,000
With an allowance recorded
Recorded investment in impaired loans and related allowances for credit losses
Recorded Investment	69,028,000		68,692,000
Unpaid Principal Balance	84,005,000		83,452,000
Related Allowance	34,456,000		33,836,000
Average Recorded Investment	68,860,000		76,933,000
Interest Income Recognized	803,000		2,645,000
With no related allowance recorded
Recorded investment in impaired loans and related allowances for credit losses
Average Recorded Investment			$ 3,244,000

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Management Agreement and Related Party Transactions (Details 2) (Affiliates, USD $)	Mar. 31, 2012 Issuer	Dec. 31, 2011 Issuer
Investments in affiliates
Aggregate par amount	$ 2,300,000,000	$ 2,400,000,000
Investment in affiliates as a percentage of total investment	30.00%	29.00%
Investment in affiliates, number of issuers	30	28
Corporate loans
Investments in affiliates
Par	2,100,000,000	2,200,000,000
Equity investments, at estimated fair value
Investments in affiliates
Par	68,900,000	62,000,000
Corporate debt securities
Investments in affiliates
Par	$ 146,600,000	$ 168,100,000

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Borrowings (Details 5) (USD $)	3 Months Ended	1 Months Ended			1 Months Ended
	Mar. 31, 2012	Nov. 30, 2011 8 375% Senior Notes due November 15, 2041	Mar. 31, 2012 8 375% Senior Notes due November 15, 2041	Dec. 31, 2011 8 375% Senior Notes due November 15, 2041	Mar. 31, 2012 7 500% senior notes due March 20, 2042
Details of Company's borrowings
Weighted Average Borrowing Rate (as a percent)			8.375%	8.375%	7.50%
Aggregate principal amount of the notes		$ 258,800,000			$ 115,000,000
Total net proceeds from senior notes	111,418,000				111,400,000
Total net proceeds from senior notes		$ 250,700,000

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011	Mar. 31, 2011	Dec. 31, 2010
Financial Assets:
Allowances for loan losses, unallocated	$ 235,807	$ 191,407	$ 198,582	$ 209,030
Equity investments, at estimated fair value	203,642	189,845
Derivative assets	31,109	28,463
Financial Liabilities:
Convertible senior notes	277,091	299,830
Senior notes	362,109	250,676
Junior subordinated notes	283,517	283,517
Related party payable	16,827	11,078
Corporate Loans
Financial Assets:
Allowances for loan losses, unallocated	235,807	191,407
Affiliates
Financial Liabilities:
Collateralized loan obligation secured debt	347,855	365,848
Accrued interest payable	7,102	6,561
Nonaffiliates
Financial Liabilities:
Collateralized loan obligation secured debt	5,496,488	5,540,037
Accrued interest payable	20,659	25,536
Carrying Amount
Financial Assets:
Cash, restricted cash, and cash equivalents	1,350,796	791,774
Securities available-for-sale	752,320	816,453
Other securities, at estimated fair value	26,076	19,671
Residential mortgage-backed securities	87,363	86,479
Corporate loans, net of allowance for loan losses of $235,807 and $191,407 as of March 31, 2012 and December 31, 2011 respectively	5,665,306	6,122,891
Corporate loans held for sale	297,708	317,332
Corporate loans, at estimated fair value	9,929	3,176
Equity investments, at estimated fair value	203,642	189,845
Interest and principal receivable	38,336	62,124
Derivative assets	31,109	28,463
Private equity investments, at cost	780	780
Financial Liabilities:
Credit facilities	66,800	38,300
Convertible senior notes	277,091	299,830
Senior notes	362,109	250,676
Junior subordinated notes	283,517	283,517
Accounts payable, accrued expenses and other liabilities	34,080	23,424
Related party payable	16,827	11,078
Securities sold, not yet purchased	1,245	1,256
Derivative liabilities	108,164	125,333
Carrying Amount | Affiliates
Financial Liabilities:
Collateralized loan obligation secured debt	347,855	365,848
Accrued interest payable	7,102	6,561
Carrying Amount | Nonaffiliates
Financial Liabilities:
Collateralized loan obligation secured debt	5,496,488	5,540,037
Accrued interest payable	20,659	25,536
Estimated Fair Value
Financial Assets:
Cash, restricted cash, and cash equivalents	1,350,796	791,774
Securities available-for-sale	752,320	816,453
Other securities, at estimated fair value	26,076	19,671
Residential mortgage-backed securities	87,363	86,479
Corporate loans, net of allowance for loan losses of $235,807 and $191,407 as of March 31, 2012 and December 31, 2011 respectively	5,723,022	5,999,771
Corporate loans held for sale	361,764	359,463
Corporate loans, at estimated fair value	9,929	3,176
Equity investments, at estimated fair value	203,642	189,845
Interest and principal receivable	38,336	62,124
Derivative assets	31,109	28,463
Private equity investments, at cost	915	780
Financial Liabilities:
Credit facilities	66,800	38,300
Convertible senior notes	357,255	368,502
Senior notes	389,310	261,834
Junior subordinated notes	256,937	262,962
Accounts payable, accrued expenses and other liabilities	34,080	23,424
Related party payable	16,827	11,078
Securities sold, not yet purchased	1,245	1,256
Derivative liabilities	108,164	125,333
Estimated Fair Value | Affiliates
Financial Liabilities:
Collateralized loan obligation secured debt	292,723	283,914
Accrued interest payable	7,102	6,561
Estimated Fair Value | Nonaffiliates
Financial Liabilities:
Collateralized loan obligation secured debt	5,217,556	5,200,534
Accrued interest payable	20,659	25,536
Quoted Prices in Active Markets for Identical Assets (Level 1)
Financial Assets:
Securities available-for-sale	6,483
Equity investments, at estimated fair value	9,806
Derivative assets	1,517
Financial Liabilities:
Senior notes	389,310
Securities sold, not yet purchased	1,245
Significant Other Observable Inputs (Level 2)
Financial Assets:
Cash, restricted cash, and cash equivalents	1,350,796
Securities available-for-sale	674,331
Other securities, at estimated fair value	23,355
Corporate loans, net of allowance for loan losses of $235,807 and $191,407 as of March 31, 2012 and December 31, 2011 respectively	5,143,183
Corporate loans held for sale	323,774
Equity investments, at estimated fair value	34,335
Interest and principal receivable	38,336
Derivative assets	15,332
Financial Liabilities:
Convertible senior notes	357,255
Accounts payable, accrued expenses and other liabilities	34,080
Related party payable	16,827
Derivative liabilities	107,902
Significant Other Observable Inputs (Level 2) | Affiliates
Financial Liabilities:
Accrued interest payable	7,102
Significant Other Observable Inputs (Level 2) | Nonaffiliates
Financial Liabilities:
Accrued interest payable	20,659
Significant Unobservable Inputs (Level 3)
Financial Assets:
Securities available-for-sale	71,506
Other securities, at estimated fair value	2,721
Residential mortgage-backed securities	87,363
Corporate loans, net of allowance for loan losses of $235,807 and $191,407 as of March 31, 2012 and December 31, 2011 respectively	579,839
Corporate loans held for sale	37,990
Corporate loans, at estimated fair value	9,929
Equity investments, at estimated fair value	159,501
Derivative assets	14,260
Private equity investments, at cost	915
Financial Liabilities:
Credit facilities	66,800
Junior subordinated notes	256,937
Derivative liabilities	262
Significant Unobservable Inputs (Level 3) | Affiliates
Financial Liabilities:
Collateralized loan obligation secured debt	292,723
Significant Unobservable Inputs (Level 3) | Nonaffiliates
Financial Liabilities:
Collateralized loan obligation secured debt	$ 5,217,556

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Borrowings (Details 3) (USD $) In Millions, unless otherwise specified	1 Months Ended	3 Months Ended
	Jan. 31, 2012	Mar. 31, 2012	Dec. 31, 2011
2015 Natural Resources Facility
Details of Company's borrowings
Credit facility term (in years)	5 years
Current borrowing capacity under line of credit facility, prior to amendment	$ 81.1
Current borrowing capacity under line of credit facility, after amendment	137.2
Amount outstanding		66.8	38.3
Letter of credit outstanding amount		1.0	1.0
Debt, variable interest rate basis		LIBOR
2015 Natural Resources Facility | Maximum
Details of Company's borrowings
Percentage of margin added to reference rate to determine interest rate on debt		2.75%
2015 Natural Resources Facility | Minimum
Details of Company's borrowings
Percentage of margin added to reference rate to determine interest rate on debt		1.75%
2014 Facility
Details of Company's borrowings
Current borrowing capacity under line of credit facility, after amendment		$ 250.0
Debt, variable interest rate basis		LIBOR
Percentage of margin added to reference rate to determine interest rate on debt		3.25%
Maximum percentage of annual taxable income that can be distributed to common stockholders (as a percent)		65.00%

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Summary of Significant Accounting Policies (Details 2)	3 Months Ended
	Mar. 31, 2012 grade component approach
Consolidation
Minimum percentage of voting interest required to consolidate non-VIEs	50.00%
Fair Value of Financial Instruments
Number of approaches used to determine fair value of investments	2
Cash and Cash Equivalents
Maximum term of original maturity to classify instrument as cash equivalents (in months)	3 months
Corporate Loans
Period for determination of non-accrual status (in days)	90 days
Allowance for Loan Losses
Number of components in the loans receivable allowance for loan losses	2
Number of internally assigned risk grades	3
Income Taxes
Minimum percentage of likelihood a tax benefit will be realized to record the tax impact	50.00%

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Fair Value of Financial Instruments (Details 3) (USD $) In Thousands, unless otherwise specified			3 Months Ended							3 Months Ended					3 Months Ended							3 Months Ended			3 Months Ended		3 Months Ended
	Mar. 31, 2012	Dec. 31, 2011	Mar. 31, 2012 Minimum	Mar. 31, 2012 Maximum	Mar. 31, 2012 Level 3 - Total Rate of Return Swaps	Mar. 31, 2012 Level 3 - Total Foreign Exchange Options - Liabilities	Mar. 31, 2012 Level 3 - Total Common Stock Warrants	Mar. 31, 2012 Level 3 - Total Other Assets	Mar. 31, 2012 Level 3 - Total Foreign Exchange Options - Assets	Mar. 31, 2012 Broker quotes Level 3 - Total Other Assets	Mar. 31, 2012 Broker quotes Level 3 - Total Other Assets Minimum	Mar. 31, 2012 Broker quotes Level 3 - Total Other Assets Maximum	Mar. 31, 2012 Market comparable Level 3 - Total Common Stock Warrants	Mar. 31, 2012 Level 3 - Total Securities Available-For-Sale: Corporate Debt Securities	Mar. 31, 2012 Level 3 - Total Securities Available-For-Sale: Corporate Debt Securities Broker quotes	Mar. 31, 2012 Level 3 - Total Securities Available-For-Sale: Corporate Debt Securities Broker quotes Minimum	Mar. 31, 2012 Level 3 - Total Securities Available-For-Sale: Corporate Debt Securities Broker quotes Maximum	Mar. 31, 2012 Level 3 - Total Securities Available-For-Sale: Corporate Debt Securities Market comparable	Mar. 31, 2012 Level 3 - Total Securities Available-For-Sale: Corporate Debt Securities Market comparable Minimum	Mar. 31, 2012 Level 3 - Total Securities Available-For-Sale: Corporate Debt Securities Market comparable Maximum	Mar. 31, 2012 Level 3 - Total Other Securities, at Estimated Fair Value	Mar. 31, 2012 Level 3 - Total Other Securities, at Estimated Fair Value Market comparable	Mar. 31, 2012 Level 3 - Total Residential Mortgage-Backed Securities	Mar. 31, 2012 Level 3 - Total Corporate Loans, at Estimated Fair Value	Mar. 31, 2012 Level 3 - Total Corporate Loans, at Estimated Fair Value Market comparable	Mar. 31, 2012 Level 3 - Total Equity investments, at Estimated Fair Value	Mar. 31, 2012 Level 3 - Total Equity investments, at Estimated Fair Value Minimum	Mar. 31, 2012 Level 3 - Total Equity investments, at Estimated Fair Value Market comparable	Mar. 31, 2012 Level 3 - Total Equity investments, at Estimated Fair Value Market comparable Minimum	Mar. 31, 2012 Level 3 - Total Equity investments, at Estimated Fair Value Market comparable Maximum	Mar. 31, 2012 Discounted cash flow Level 3 - Total Common Stock Warrants	Mar. 31, 2012 Discounted cash flow Level 3 - Total Securities Available-For-Sale: Corporate Debt Securities	Mar. 31, 2012 Discounted cash flow Level 3 - Total Residential Mortgage-Backed Securities	Mar. 31, 2012 Discounted cash flow Level 3 - Total Residential Mortgage-Backed Securities Minimum	Mar. 31, 2012 Discounted cash flow Level 3 - Total Residential Mortgage-Backed Securities Maximum	Mar. 31, 2012 Discounted cash flow Level 3 - Total Equity investments, at Estimated Fair Value	Mar. 31, 2012 Discounted cash flow Level 3 - Total Equity investments, at Estimated Fair Value Minimum	Mar. 31, 2012 Discounted cash flow Level 3 - Total Equity investments, at Estimated Fair Value Maximum	Mar. 31, 2012 Option pricing model Level 3 - Total Foreign Exchange Options - Liabilities	Mar. 31, 2012 Option pricing model Level 3 - Total Foreign Exchange Options - Assets	Mar. 31, 2012 Option pricing model Level 3 - Total Foreign Exchange Options - Assets Minimum	Mar. 31, 2012 Option pricing model Level 3 - Total Foreign Exchange Options - Assets Maximum
Valuation techniques used for assets, measured at fair value and categarized within level 3
Securities available-for-sale														$ 71,506
Other securities, at estimated fair value																					2,721
Residential mortgage-backed securities																							87,363
Corporate loans, at estimated fair value																								9,929
Equity investments, at estimated fair value	203,642	189,845																								159,501
Derivative asset, fair value					293		1,551		12,416
Other assets								676
Derivative liability, fair value						$ (262)
Yield																		15.00%	8.00%	25.00%		11.00%			39.00%
Discount margin																		14.00%	6.00%	24.00%					37.72%
Total leverage																		300.00%	100.00%	600.00%
Illiquidity discount																		4.00%	2.00%	7.00%					20.00%		5.00%
Weighted average cost of capital																															11.00%	12.00%				11.00%	8.00%	15.00%
Offered quotes										0.76	0.09	1.80			84	60	103.00
Probability of default																																	11.00%	0.00%	32.00%
Loss severity																																	33.00%	24.00%	80.00%
Constant prepayment rate																																	13.00%	0.00%	35.00%
LTM EBITDA multiple													6.2															10	7	14
Forward EBITDA multiple													6.1															9	6	12
Control premium																												25.00%
Exit multiple LTM EBITDA																															6.1					8	6	11
Forward and spot rates, Assets																																								1.36	0.02	1.42
Forward and spot rates, Liabilities																																							0.02
Weight ascribed to each valuation technique (as a percent)			0.00%	100.00%

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Corporate Loans and Allowance for Loan Losses (Tables)

3 Months Ended

Mar. 31, 2012

Corporate Loans and Allowance for Loan Losses

Schedule of corporate loans

	March 31, 2012
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,056,204		$	434,336		$	12,411		$	6,502,951
Net unamortized discount	(155,091		)	(97,031		)	(3,634		)	(255,756		)
Total amortized cost	5,901,113			337,305			8,777			6,247,195
Lower of cost or fair value adjustment	—			(39,597		)	—			(39,597		)
Allowance for loan losses	(235,807		)	—			—			(235,807		)
Unrealized gains	—			—			1,152			1,152
Net carrying value	$	5,665,306		$	297,708		$	9,929		$	5,972,943

(1)Principal amount is net of cumulative charge-offs and other adjustments totaling $83.8 million as of March 31, 2012.

	December 31, 2011
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,501,679		$	470,562		$	3,655		$	6,975,896
Net unamortized discount	(187,381		)	(102,324		)	(562		)	(290,267		)
Total amortized cost	6,314,298			368,238			3,093			6,685,629
Lower of cost or fair value adjustment	—			(50,906		)	—			(50,906		)
Allowance for loan losses	(191,407		)	—			—			(191,407		)
Unrealized gains	—			—			83			83
Net carrying value	$	6,122,891		$	317,332		$	3,176		$	6,443,399

(1)Principal amount is net of cumulative charge-offs and other adjustments totaling $79.8 million as of December 31, 2011.

Schedule of changes in the allowance for loan losses

	For the three months ended March 31, 2012			For the three months ended March 31, 2011
Allowance for loan losses:
Beginning balance	$	191,407		$	209,030
Provision for loan losses	46,498			11,661
Charge-offs	(2,098		)	(22,109		)
Ending balance	$	235,807		$	198,582

Schedule of ending balances of allowances for loan losses

	March 31, 2012		December 31, 2011
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	235,807	$	191,407
Ending balance: collectively evaluated for impairment	—		—
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	235,807	$	191,407
Corporate loans (recorded investment)(1):
Ending balance: individually evaluated for impairment	$	5,917,667	$	6,334,232
Ending balance: collectively evaluated for impairment	—		—
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	5,917,667	$	6,334,232

(1)           Recorded investment is defined as amortized cost plus accrued interest.

Schedule of investment in impaired loans and the related allowance for credit losses

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2012
With no related allowance recorded	$	—	$	—	$	—	$	—	$	—
With an allowance recorded	69,028		84,005		34,456		68,860		803
Total	$	69,028	$	84,005	$	34,456	$	68,860	$	803

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2011
With no related allowance recorded	$	—	$	—	$	—	$	3,244	$	—
With an allowance recorded	68,692		83,452		33,836		76,933		2,645
Total	$	68,692	$	83,452	$	33,836	$	80,177	$	2,645

Schedule of recorded investment in non-accrual loans

	March 31, 2012		December 31, 2011
Impaired loans held for investment	$	69,028	$	68,692
Loans held for sale	100,291		99,999
Total non-accrual loans	$	169,319	$	168,691

Schedule of recorded investment in corporate loans

Internally Assigned Grade	Capital Hierarchy	Recorded Investment March 31, 2012 (1)		Recorded Investment December 31, 2011 (1)
High	Senior Secured Loan	$	777,054	$	926,258
	Second Lien Loan	295,239		310,971
	Subordinated	10,349		14,392
		$	1,082,642	$	1,251,621
Moderate	Senior Secured Loan	$	585,694	$	645,939
	Second Lien Loan	—		—
	Subordinated	—		6,951
		$	585,694	$	652,890
Low	Senior Secured Loan	$	4,011,616	$	4,184,094
	Second Lien Loan	126,238		65,695
	Subordinated	42,449		111,240
		$	4,180,303	$	4,361,029
	Total Unallocated	$	5,848,639	$	6,265,540
	Total Allocated	69,028		68,692
	Total Loans Held for Investment	$	5,917,667	$	6,334,232

(1)Recorded investment is defined as amortized cost plus accrued interest.

Schedule of amortized cost of corporate loans and corporate loans held for sale pledged as collateral

	As of March 31, 2012		As ofDecember 31, 2011
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	6,017,183	$	6,448,404
Total	$	6,017,183	$	6,448,404

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Accumulated Other Comprehensive Loss (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Accumulated other comprehensive (loss) income
Net unrealized gains on available-for-sale securities	$ 79,895	$ 62,248
Net unrealized losses on cash flow hedges	(83,275)	(97,867)
Accumulated other comprehensive loss	$ (3,380)	$ (35,619)

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Corporate Loans and Allowance for Loan Losses (Details 6) (Affiliated, USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Affiliated
Amortized cost of corporate loans held for sale and corporate loans pledged as collateral
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$ 6,017,183	$ 6,448,404
Total loans pledged as collateral	$ 6,017,183	$ 6,448,404

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Corporate Loans and Allowance for Loan Losses (Details) (USD $)	Mar. 31, 2012	Dec. 31, 2011	Mar. 31, 2011	Dec. 31, 2010
Summary of corporate loans
Principal	$ 6,502,951,000	$ 6,975,896,000
Net unamortized discount	(255,756,000)	(290,267,000)
Total amortized cost	6,247,195,000	6,685,629,000
Lower of cost or fair value adjustment	(39,597,000)	(50,906,000)
Allowance for loan losses	(235,807,000)	(191,407,000)	(198,582,000)	(209,030,000)
Unrealized gains	1,152,000	83,000
Net carrying value	5,972,943,000	6,443,399,000
Cumulative charge-offs and other adjustments	83,800,000	79,800,000
Corporate Loans
Summary of corporate loans
Principal	6,056,204,000	6,501,679,000
Net unamortized discount	(155,091,000)	(187,381,000)
Total amortized cost	5,901,113,000	6,314,298,000
Allowance for loan losses	(235,807,000)	(191,407,000)
Net carrying value	5,665,306,000	6,122,891,000
Corporate Loans Held for Sale
Summary of corporate loans
Principal	434,336,000	470,562,000
Net unamortized discount	(97,031,000)	(102,324,000)
Total amortized cost	337,305,000	368,238,000
Lower of cost or fair value adjustment	(39,597,000)	(50,906,000)
Net carrying value	297,708,000	317,332,000
Corporate Loans, at Estimated Fair Value
Summary of corporate loans
Principal	12,411,000	3,655,000
Net unamortized discount	(3,634,000)	(562,000)
Total amortized cost	8,777,000	3,093,000
Unrealized gains	1,152,000	83,000
Net carrying value	$ 9,929,000	$ 3,176,000

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Common Shares, Restricted Shares and Share Options (Details) (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
2007 Share Incentive Plan
Stock-based compensation
Authorized shares available to satisfy awards as of the balance sheet date	8,714,625
Restricted common shares
Restricted common share transactions
Unvested shares at the beginning of the period	386,521
Issued (in shares)	258,303
Vested (in shares)	(60,211)
Unvested shares at the end of the period	584,613
Unrecognized compensation cost	$ 3,900,000	$ 2,900,000
Weighted Average Exercise Price
Share-based compensation expense	614,000	1,833,000
Restricted common shares | Manager
Stock-based compensation
Vesting period (in years)	3 years
Restricted common share transactions
Unvested shares at the beginning of the period	240,845
Issued (in shares)	258,303
Vested (in shares)	(60,211)
Unvested shares at the end of the period	438,937
Value of unvested restricted common shares granted (in dollars per share)	$ 9.21	$ 9.79
Weighted Average Exercise Price
Share-based compensation expense	383,000	1,634,000
Restricted common shares | Directors
Restricted common share transactions
Unvested shares at the beginning of the period	145,676
Unvested shares at the end of the period	145,676
Weighted Average Exercise Price
Share-based compensation expense	$ 231,000	$ 199,000
Common share options
Stock-based compensation
Exercise price of share options granted, minimum (as a percent)	100.00%
Termination period from date of grant (in years)	P10Y
Number of Options
Outstanding at the beginning of the period (in shares)	1,932,279
Outstanding at the end of the period (in shares)	1,932,279
Exercisable at the end of the period (in shares)	1,932,279	1,932,279
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)	$ 20.00
Outstanding at the end of the period (in dollars per share)	$ 20.00

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Segment Reporting (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Reconciliation of assets from segment to consolidated
Total assets	$ 8,772,190	$ 8,647,228
Credit
Reconciliation of assets from segment to consolidated
Total assets	8,524,160	8,487,702
Other
Reconciliation of assets from segment to consolidated
Total assets	247,442	158,639
Reconciling Items
Reconciliation of assets from segment to consolidated
Total assets	$ 588	$ 887

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Borrowings (Details 4) (USD $)	3 Months Ended			12 Months Ended	3 Months Ended	12 Months Ended
	Mar. 31, 2012	Mar. 31, 2011	Mar. 31, 2012 7.0% convertible senior notes	Dec. 31, 2011 7.0% convertible senior notes	Mar. 31, 2012 7 500% convertible senior notes	Dec. 31, 2010 7 500% convertible senior notes
Details of Company's borrowings
Principal amount of debt extinguishment			$ 23,100,000	$ 45,500,000
Loss on repurchase of convertible notes			400,000	1,700,000
Write-off of unamortized debt issuance costs	386,000	450,000		100,000
Principal amount used for debt instrument conversion ratio			1,000		1,000
Number of shares per $1000 principal into which the debt can be converted			32.2581		135.2005
Conversion price per share			$ 31.00
Convertible senior notes issued, principal amount						172,500,000
Carrying amount of equity component included in paid-in-capital					10,000,000
Convertible debt principal amount					172,500,000
Total net proceeds from senior notes	111,418,000					167,300,000
Debt discount, unamortized					7,400,000
Debt discount, amortized					300,000
Outstanding borrowings					165,100,000
Effective interest rate to amortize debt discount (as a percent)					8.60%
Interest expense, recognized					$ 3,200,000

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of the Company and entities established to complete secured financing transactions that are considered to be variable interest entities and for which the Company is the primary beneficiary.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The Company’s results for any interim period are not necessarily indicative of results for a full year or any other interim period. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from management’s estimates.

Consolidation

KKR Financial CLO 2005-1, Ltd. (“CLO 2005-1”), KKR Financial CLO 2005-2, Ltd. (“CLO 2005-2”), KKR Financial CLO 2006-1, Ltd. (“CLO 2006-1”), KKR Financial CLO 2007-1, Ltd. (“CLO 2007-1”), KKR Financial CLO 2007-A, Ltd. (“CLO 2007-A”) and KKR Financial CLO 2011-1, Ltd. (“CLO 2011-1”) are entities established to complete secured financing transactions. These entities are variable interest entities (“VIEs”) which the Company consolidates as the Company has determined it has the power to direct the activities that most significantly impact these entities’ economic performance and the Company has both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities. In CLO transactions, subordinated notes have the first risk of loss and conversely, the residual value upside of the transactions. These CLOs are considered non-recourse leverage to the Company.

The Company finances the majority of its corporate debt investments through its CLOs. As of March 31, 2012, the Company’s six CLOs, held $6.9 billion par amount, or $6.5 billion estimated fair value, of corporate debt investments. As of December 31, 2011, the Company’s six CLOs, held $7.4 billion par amount, or $6.8 billion estimated fair value, of corporate debt investments. The assets in each CLO can be used only to settle the debt of the related CLO. As of March 31, 2012, the aggregate CLO debt totaled $5.5 billion of secured debt outstanding held by unaffiliated third parties and $347.9 million of junior secured notes outstanding held by an affiliate of the Manager. As of December 31, 2011, the aggregate CLO debt totaled $5.5 billion of secured debt outstanding held by unaffiliated third parties and $365.8 million of junior secured notes outstanding held by an affiliate of the Manager.

In addition, the Company continues to consolidate all non-VIEs in which it holds a greater than 50 percent voting interest.

All inter-company balances and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:

Level 1:  Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets generally included in this category are equity securities listed in active markets.

Level 2:  Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value and certain financial instruments classified as derivatives.

Level 3:  Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value, residential mortgage-backed securities (“RMBS”) and certain financial instruments classified as derivatives.

A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which the Company recognizes at the end of the reporting period.

Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that the Company and others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, the Company does not require that fair value always be a predetermined point in the bid-ask range. The Company’s policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets the Company’s best estimate of fair value.

Depending on the relative liquidity in the markets for certain assets, the Company may transfer assets to Level 3 if it determines that observable quoted prices, obtained directly or indirectly, are not available. The valuation techniques used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.

Corporate Debt Securities:  Corporate debt securities are initially valued at transaction price and are subsequently valued using market data for similar instruments (e.g., recent transactions or broker quotes), comparisons to benchmark derivative indices or valuation models. Valuation models are based on discounted cash flow techniques, for which the key inputs are the amount and timing of expected future cash flows, market yields for such instruments and recovery assumptions. Inputs are determined based on relative value analyses, which incorporate similar instruments from similar issuers.

Equity Investments, at Estimated Fair Value:  Equity investments, at estimated fair value, are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on a market and income (discounted cash flow) approaches, in which various internal and external factors are considered. Factors include the price at which the investment was acquired, the nature of the investment, current market conditions, recent public market and private transactions for comparable securities, and financing transactions subsequent to the acquisition of the investment. The fair value recorded for a particular investment will generally be within the range suggested by the two approaches.

Over-the-counter (“OTC”) Derivative Contracts:  OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit standing of reference entities, and equity prices. The fair value of OTC derivative products can be modeled using a series of techniques, including closed-form analytic formulae, such as the Black-Scholes option-pricing model, and simulation models or a combination thereof. Many pricing models do not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, as is the case for generic interest rate swap and option contracts.

Residential Mortgage-Backed Securities, at Estimated Fair Value:  Residential mortgage-backed securities are initially valued at transaction price and are subsequently valued using industry recognized models (including Intex and Bloomberg) and data for similar instruments (e.g., nationally recognized pricing services or broker quotes). The most significant inputs to the valuation of these instruments are default and loss expectations and market credit spreads.

Valuation Process

The valuation process involved in Level 3 measurements for assets and liabilities is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The Company has a valuation committee, whose members consist of the Company’s Chief Executive Officer, Chief Financial Officer, General Counsel and certain other employees of the Manager. The Company’s valuation committee is responsible for coordinating and implementing the Company’s quarterly valuation process. For assets classified as Level 3, the investment professionals are responsible for documenting preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and model projections discussed above, among other factors. The Company engages an independent valuation firm to opine on its valuations for certain holdings over a specific dollar threshold. All valuations are approved by the Company’s valuation committee.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash held in banks and highly liquid investments with original maturities of three months or less. Interest income earned on cash and cash equivalents is recorded in other investment income.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents represent amounts that are held by third parties under certain of the Company’s financing and derivative transactions. Interest income earned on restricted cash and cash equivalents is recorded in other investment income.

On the condensed consolidated statement of cash flows, net additions or reductions to restricted cash and cash equivalents are classified as an investing activity as restricted cash and cash equivalents reflect the receipts from collections or sales of investments, as well as payments made to acquire investments held by third parties.

Securities

Securities Available-for-Sale

The Company classifies its investments in securities as available-for-sale as the Company may sell them prior to maturity and does not hold them principally for the purpose of selling them in the near term. These investments are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive (loss) income. Estimated fair values are based on quoted market prices, when available, on estimates provided by independent pricing sources or dealers who make markets in such securities, or internal valuation models when external sources of fair value are not available. Upon the sale of a security, the realized net gain or loss is computed on a weighted average cost basis. Purchases and sales of securities are recorded on the trade date.

The Company monitors its available-for-sale securities portfolio for impairments. A loss is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. The Company considers many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost and the severity of the decline, the amount of the unrealized loss, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. In addition, for debt securities, the Company considers its intent to sell the debt security, the Company’s estimation of whether or not it expects to recover the debt security’s entire amortized cost if it intends to hold the debt security, and whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery. For equity securities, the Company also considers its intent and ability to hold the equity security for a period of time sufficient for a recovery in value.

The amount of the loss that is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary is dependent on certain factors. If the security is an equity security or if the security is a debt security that the Company intends to sell or estimates that it is more likely than not that the Company will be required to sell before recovery of its amortized cost, then the impairment amount recognized in earnings is the entire difference between the estimated fair value of the security and its amortized cost. For debt securities that the Company does not intend to sell or estimates that it is not more likely than not to be required to sell before recovery, the impairment is separated into the estimated amount relating to credit loss and the estimated amount relating to all other factors. Only the estimated credit loss amount is recognized in earnings, with the remainder of the loss amount recognized in other comprehensive (loss) income.

Unamortized premiums and unaccreted discounts on securities available-for-sale are recognized in interest income over the contractual life, adjusted for actual prepayments, of the securities using the effective interest method.

Other Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain securities for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these securities. Other securities, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in income.

Residential Mortgage-Backed Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for its residential mortgage investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of its residential mortgage investments. RMBS, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in income.

Equity Investments, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain marketable equity securities and private equity investments. The Company elects the fair value option of accounting for private equity investments received through restructuring debt transactions or issued by an entity in which the Company may have significant influence. The Company elected the fair value option for certain equity investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these equity investments. Equity investments, at fair value, are managed based on overall value and potential returns. These equity investments carried at fair value are presented separately on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains and losses on investments on the condensed consolidated statements of operations.

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased consist of equity and debt securities that the Company has sold short. In order to facilitate a short sale, the Company borrows the securities from another party and delivers the securities to the buyer. The Company will be required to “cover” its short sale in the future through the purchase of the security in the market at the prevailing market price and deliver it to the counterparty from which it borrowed. The Company is exposed to a loss to the extent that the security price increases during the time from when the Company borrowed the security to when the Company purchases it in the market to cover the short sale. Securities sold, not yet purchased are presented within accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets with gains and losses reported in net realized and unrealized gains and losses on investments on the condensed consolidated statement of operations.

Corporate Loans, Net

Corporate Loans

Corporate loans are generally held for investment and the Company initially records loans at their purchase prices. The Company subsequently accounts for loans based on their outstanding principal plus or minus unaccreted purchase discounts and unamortized purchase premiums. Corporate loans that the Company transfers to held for sale are transferred at the lower of cost or estimated fair value.

Interest income on loans includes interest at stated coupon rates adjusted for accretion of purchase discounts and the amortization of purchase premiums. Unamortized premiums and unaccreted discounts are recognized in interest income over the contractual life, adjusted for actual prepayments, of the loans using the effective interest method.

A loan is typically placed on non-accrual status at such time as: (i) management believes that scheduled debt service payments may not be paid when contractually due; (ii) the loan becomes 90 days delinquent; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the underlying collateral securing the loan decreases below the Company’s carrying value of such loan. As such, loans placed on non-accrual status may or may not be contractually past due at the time of such determination. While on non-accrual status, previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using the cost-recovery method, cash-basis method or some combination of the two methods. A loan is placed back on accrual status when the ultimate collectability of the principal and interest is not in doubt.

The Company may modify corporate loans in transactions where the borrower is experiencing financial difficulty and a concession is granted to the borrower as part of the modification. These concessions may include a reduction in interest rate, payment extensions, forgiveness of principal, an exchange of assets or a combination thereof. Such modifications typically qualify as troubled debt restructurings. The Company may also identify receivables that are newly considered impaired and discloses the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired.

In addition, the Company may also modify corporate loans which usually involve changes in existing interest rates combined with changes of existing maturities to prevailing market rates/maturities for similar instruments at the time of modification. Such modifications typically do not meet the definition of a troubled debt restructuring since the respective borrowers are neither experiencing financial difficulty nor are seeking a concession as part of the modification.

The corporate loans the Company invests in are generally deemed in default upon the non-payment of a single interest payment or as a result of the violation of a covenant in the respective loan agreement. The Company charges-off a portion or all of its amortized cost basis in a corporate loan when it determines that it is uncollectible due to either: i) the estimation based on a recovery value analysis of a defaulted loan that less than the amortized cost amount will be recovered through the agreed upon restructuring of the loan or as a result of a bankruptcy process of the issuer of the loan; or ii) the determination by the Company to transfer a loan to held for sale with the loan having an estimated market value below the amortized cost basis of the loan.

Loans acquired with deteriorated credit quality are recorded at initial cost and interest income is recognized as the difference between the Company’s estimate of all cash flows that it will receive from the loan in excess of its initial investment on a level-yield basis over the life of the loan (accretable yield) using the effective interest method.

Allowance for Loan Losses

The Company’s corporate loan portfolio is comprised of a single portfolio segment which includes one class of financing receivables, that is, high yield loans that are purchased via assignment or participation in either the primary or secondary market and are held primarily for investment. High yield loans are generally characterized as having below investment grade ratings or being unrated.

The Company’s allowance for loan losses represents its estimate of probable credit losses inherent in its corporate loan portfolio held for investment as of the balance sheet date. Estimating the Company’s allowance for loan losses involves a high degree of management judgment and is based upon a comprehensive review of the Company’s loan portfolio that is performed on a quarterly basis. The Company’s allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses pertains to specific loans that the Company has determined are impaired. The Company determines a loan is impaired when management estimates that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis the Company performs a comprehensive review of its entire loan portfolio and identifies certain loans that it has determined are impaired. Once a loan is identified as being impaired, the Company places the loan on non-accrual status, unless the loan is already on non-accrual status, and records a reserve that reflects management’s best estimate of the loss that the Company expects to recognize from the loan. The expected loss is estimated as being the difference between the Company’s current cost basis of the loan, including accrued interest receivable, and the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the loan’s observable estimated fair value may be used.

The unallocated component of the Company’s allowance for loan losses represents its estimate of probable losses inherent in the loan portfolio as of the balance sheet date where the specific loan that the loan loss relates to is indeterminable. The Company estimates the unallocated component of the allowance for loan losses through a comprehensive review of its loan portfolio and identifies certain loans that demonstrate possible indicators of impairment, including internally assigned credit quality indicators. This assessment excludes all loans that are determined to be impaired and as a result, an allocated reserve has been recorded as described in the preceding paragraph. Such indicators include, but are not limited to, the current and/or forecasted financial performance and liquidity profile of the issuer, specific industry or economic conditions that may impact the issuer, and the observable trading price of the loan if available. All loans are first categorized based on their assigned risk grade and further stratified based on the seniority of the loan in the issuer’s capital structure. The seniority classifications assigned to loans are senior secured, second lien and subordinate. Senior secured consists of loans that are the most senior debt in an issuer’s capital structure and therefore have a lower estimated loss severity than other debt that is subordinate to the senior secured loan. Senior secured loans often have a first lien on some or all of the issuer’s assets. Second lien consists of loans that are secured by a second lien interest on some or all of the issuer’s assets; however, the loan is subordinate to the first lien debt in the issuer’s capital structure. Subordinate consists of loans that are generally unsecured and subordinate to other debt in the issuer’s capital structure.

There are three internally assigned risk grades that are applied to loans that have not been identified as being impaired: high, moderate and low. High risk means that there is evidence of possible loss due to the financial or operating performance and liquidity of the issuer, industry or economic concerns specific to the issuer, or other factors that indicate that the breach of a covenant contained in the related loan agreement is possible. Moderate risk means that while there is not observable evidence of loss, there are issuer and/or industry specific trends that indicate a loss may have occurred. Low risk means that while there is no identified evidence of loss, there is the risk of loss inherent in the loan that has not been identified. All loans held for investment, with the exception of loans that have been identified as impaired, are assigned a risk grade of high, moderate or low.

The Company applies a range of default and loss severity estimates in order to estimate a range of loss outcomes upon which to base its estimate of probable losses that results in the determination of the unallocated component of the Company’s allowance for loan losses.

Corporate Loans Held for Sale

From time to time the Company makes the determination to transfer certain of its corporate loans from held for investment to held for sale. The decision to transfer a loan to held for sale is generally as a result of the Company determining that the respective loan’s credit quality in relation to the loan’s expected risk-adjusted return no longer meets the Company’s investment objective and/or the Company deciding to reduce or eliminate its exposure to a particular loan for risk management purposes. Corporate loans held for sale are stated at lower of cost or estimated fair value and are assessed on an individual basis. Prior to transferring a loan to held for sale, any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to the yield by the interest method. The loan is transferred from held for investment to held for sale at the lower of its cost or estimated fair value and is carried at the lower of its cost or estimated fair value thereafter. Subsequent to transfer and while the loan is held for sale, recognition as an adjustment to yield by the interest method is discontinued for any difference between the carrying amount of the loan and its outstanding principal balance.

From time to time the Company also makes the determination to transfer certain of its corporate loans from held for sale back to held for investment. The decision to transfer a loan back to held for investment is generally as a result of the circumstances that led to the initial transfer to held for sale no longer being present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy. The loan is transferred from held for sale back to held for investment at the lower of its cost or estimated fair value, whereby a new cost basis is established based on this amount.

Interest income on corporate loans classified as held for sale is recognized through accrual of the stated coupon rate for the loans, unless the loans are placed on non-accrual status, at which point previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using either the cost-recovery method or on a cash-basis.

Corporate Loans, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain corporate loans for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these corporate loans. Corporate loans carried at estimated fair value are included within corporate loans, net on the condensed consolidated balance sheets with unrealized gains and losses reported in income.

Long-Lived Assets

The Company evaluates its proved oil and natural gas properties and related equipment and facilities for impairment whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. For the three months ended March 31, 2012 and 2011, the Company recorded an immaterial amount and zero, respectively, of impairments related to its oil and natural gas assets, which are included in other assets on the condensed consolidated balance sheets.

Borrowings

The Company finances the majority of its investments through the use of secured borrowings in the form of securitization transactions structured as non-recourse secured financings and other secured and unsecured borrowings. In addition, the Company finances certain of its oil and gas asset acquisitions through borrowings. The Company recognizes interest expense on all borrowings on an accrual basis.

Trust Preferred Securities

Trusts formed by the Company for the sole purpose of issuing trust preferred securities are not consolidated by the Company as the Company has determined that it is not the primary beneficiary of such trusts. The Company’s investment in the common securities of such trusts is included in other assets on the condensed consolidated balance sheets.

Derivative Financial Instruments

The Company recognizes all derivatives on the condensed consolidated balance sheet at estimated fair value. On the date the Company enters into a derivative contract, the Company designates and documents each derivative contract as one of the following at the time the contract is executed: (i) a hedge of a recognized asset or liability (“fair value” hedge); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (iii) a hedge of a net investment in a foreign operation; or (iv) a derivative instrument not designated as a hedging instrument (“free-standing derivative”). For a fair value hedge, the Company records changes in the estimated fair value of the derivative instrument and, to the extent that it is effective, changes in the fair value of the hedged asset or liability in the current period earnings in the same financial statement category as the hedged item. For a cash flow hedge, the Company records changes in the estimated fair value of the derivative to the extent that it is effective in other comprehensive (loss) income and subsequently reclassifies these changes in estimated fair value to net income in the same period(s) that the hedged transaction affects earnings. The effective portion of the cash flow hedges is recorded in the same financial statement category as the hedged item. For free-standing derivatives, the Company reports changes in the fair values in other income (loss).

The Company formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Company’s evaluation of effectiveness of its hedged transactions. Periodically, the Company also formally assesses whether the derivative it designated in each hedging relationship is expected to be and has been highly effective in offsetting changes in estimated fair values or cash flows of the hedged item using either the dollar offset or the regression analysis method. If the Company determines that a derivative is not highly effective as a hedge, it discontinues hedge accounting.

Foreign Currency

The Company makes investments in non-United States dollar denominated securities and loans. As a result, the Company is subject to the risk of fluctuation in the exchange rate between the United States dollar and the foreign currency in which it makes an investment. In order to reduce the currency risk, the Company may hedge the applicable foreign currency. All investments denominated in a foreign currency are converted to the United States dollar using prevailing exchange rates on the balance sheet date. Income, expenses, gains and losses on investments denominated in a foreign currency are converted to the United States dollar using the prevailing exchange rates on the dates when they are recorded. Foreign exchange gains and losses are recorded in the condensed consolidated statements of operations.

Manager Compensation

The Management Agreement provides for the payment of a base management fee to the Manager, as well as an incentive fee if the Company’s financial performance exceeds certain benchmarks. Additionally, the Management Agreement provides for the Manager to be reimbursed for certain expenses incurred on the Company’s behalf. See Note 11 to these condensed consolidated financial statements for additional discussion on the payment of the base management fee and incentive fee. The base management fee and the incentive fee are accrued and expensed during the period for which they are earned by the Manager.

Share-Based Compensation

The Company accounts for share-based compensation issued to its directors and to its Manager using the fair value based methodology in accordance with relevant accounting guidance. Compensation cost related to restricted common shares issued to the Company’s directors is measured at its estimated fair value at the grant date, and is amortized and expensed over the vesting period on a straight-line basis. Compensation cost related to restricted common shares and common share options issued to the Manager is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards are unvested. The Company has elected to use the graded vesting attribution method to amortize compensation expense for the restricted common shares and common share options granted to the Manager.

Income Taxes

The Company intends to continue to operate so as to qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation. Therefore, the Company generally is not subject to United States federal income tax at the entity level, but is subject to limited state and foreign taxes. Holders of the Company’s shares will be required to take into account their allocable share of each item of the Company’s income, gain, loss, deduction, and credit for the taxable year of the Company ending within or with their taxable year.

During 2012, the Company owned an equity interest in KKR Financial Holdings II, LLC (“KFH II”), which elected to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). KFH II holds certain real estate mortgage-backed securities. A REIT generally is not subject to United States federal income tax to the extent that it currently distributes its income and satisfies certain asset, income and ownership tests, and recordkeeping requirements, but it may be subject to some amount of federal, state, local and foreign taxes based on its taxable income.

The Company has wholly-owned domestic and foreign subsidiaries that are taxable as corporations for United States federal income tax purposes and thus are not consolidated with the Company for United States federal income tax purposes. For financial reporting purposes, current and deferred taxes are provided for on the portion of earnings recognized by the Company with respect to its interest in the domestic taxable corporate subsidiaries, because each is taxed as a regular corporation under the Code. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP condensed consolidated financial statements and the United States federal income tax basis of assets and liabilities as of each condensed consolidated balance sheet date. The foreign corporate subsidiaries were formed to make certain foreign and domestic investments from time to time. The foreign corporate subsidiaries are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands, and are anticipated to be exempt from United States federal and state income tax at the corporate entity level because they restrict their activities in the United States to trading in stock and securities for their own account. However, the Company will be required to include their current taxable income in the Company’s calculation of its taxable income allocable to shareholders.

The Company must recognize the tax impact from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax impact recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain tax positions are recorded as tax expense. Significant judgment is required in the identification of uncertain tax positions and in the estimation of penalties and interest on uncertain tax positions. If it is determined that recognition for an uncertain tax provision is necessary, the Company would record a liability for an unrecognized tax expense from an uncertain tax position taken or expected to be taken.

Earnings Per Share

The Company presents both basic and diluted earnings per common share (“EPS”) in its condensed consolidated financial statements and footnotes thereto. Basic earnings per common share (“Basic EPS”) excludes dilution and is computed by dividing net income or loss by the weighted average number of common shares, including vested restricted common shares, outstanding for the period. The Company calculates EPS using the more dilutive of the two-class method or the if-converted method. The two-class method is an earnings allocation formula that determines EPS for common shares and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS using the two-class method. Accordingly, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Diluted earnings (loss) per share (“Diluted EPS”) reflects the potential dilution of common share options and unvested restricted common shares using the treasury method, as well as the potential dilution of convertible senior notes using the number of shares it would take to satisfy the excess conversion obligation (average Company share price for the period in excess of the conversion price related to the Company’s convertible senior notes), if they are not anti-dilutive.

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Subsequent Events (Details) (Declaration of cash distribution, USD $)	Apr. 24, 2012
Declaration of cash distribution
Subsequent events
Cash distribution declared (in dollars per share)	$ 0.18

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Corporate Loans and Allowance for Loan Losses (Details 7) (USD $) In Millions, unless otherwise specified	Mar. 31, 2012 Issuer	Dec. 31, 2011 Issuer
Texas Competitive Electric Holdings Company LLC, Modular Space Corporation, and U.S. Foodservice
Concentrated risks
Concentration risk of total amortized cost basis (as a percent)	16.00%	15.00%
Number of issuers with the largest concentration of corporate loans	3	3
Amortized cost of corporate loans concentrated in major issuers	$ 993.9	$ 992.5
Corporate Loans
Concentrated risks
Number of issuers with whom a specified percentage of amortized cost of corporate loans is concentrated	20	20
Corporate Loans | Percent to Total Corporate Loans
Concentrated risks
Concentration risk of total amortized cost basis (as a percent)	48.00%	47.00%

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Common Shares, Restricted Shares and Share Options (Tables)

3 Months Ended

Mar. 31, 2012

Common Shares, Restricted Shares and Share Options

Schedule of restricted common share transactions

	Manager		Directors	Total
Unvested shares as of January 1, 2012	240,845		145,676	386,521
Issued	258,303		—	258,303
Vested	(60,211	)	—	(60,211	)
Forfeited	—		—	—
Unvested shares as of March 31, 2012	438,937		145,676	584,613

Schedule of common share option transactions

	Number of Options	Weighted Average Exercise Price
Outstanding as of January 1, 2012	1,932,279	$	20.00
Granted	—	—
Exercised	—	—
Forfeited	—	—
Outstanding as of March 31, 2012	1,932,279	$	20.00

Schedule of share-based compensation expense

	For the three months ended March 31, 2012		For the three months ended March 31, 2011
Restricted shares granted to Manager	$	383	$	1,634
Restricted shares granted to certain directors	231		199
Total share-based compensation expense	$	614	$	1,833

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Accumulated Other Comprehensive Loss (Tables)

3 Months Ended

Mar. 31, 2012

Accumulated Other Comprehensive Loss

Schedule of components of accumulated other comprehensive loss

	As of March 31, 2012			As of December 31, 2011
Net unrealized gains on available-for-sale securities	$	79,895		$	62,248
Net unrealized losses on cash flow hedges	(83,275		)	(97,867		)
Accumulated other comprehensive loss	$	(3,380	)	$	(35,619	)

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Fair Value of Financial Instruments (Details 2) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Assets and liabilities measured at fair value on a recurring basis
Securities available-for-sale	$ 752,320,000	$ 816,453,000
Securities, at estimated fair value	865,759,000	922,603,000
Equity investments, at estimated fair value	203,642,000	189,845,000
Loans held for sale, carrying value	297,708,000	317,332,000
Loans held for sale, amortized cost	187,200,000	151,500,000
Estimated Fair Value	(77,055,000)	(96,870,000)
Corporate debt securities
Assets and liabilities measured at fair value on a recurring basis
Securities available-for-sale	745,837,000	803,243,000
Common and preferred stock
Assets and liabilities measured at fair value on a recurring basis
Securities available-for-sale	6,483,000	13,210,000
Total rate of return swaps
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	293,000
Foreign exchange options
Assets and liabilities measured at fair value on a recurring basis
Derivative liability, fair value	(262,000)
Common stock warrants
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	1,551,000
Other assets
Assets and liabilities measured at fair value on a recurring basis
Other assets	676,000
Foreign exchange forward contracts
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	12,416,000
Recurring basis | Credit default swaps-protection sold
Assets and liabilities measured at fair value on a recurring basis
Estimated Fair Value	116,000
Recurring basis | Credit default swaps-protection purchased
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	1,681,000
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets and liabilities measured at fair value on a recurring basis
Total securities available-for-sale	6,483,000	11,902,000
Securities, at estimated fair value	6,483,000	11,902,000
Equity investments, at estimated fair value	9,806,000	10,498,000
Securities sold, not yet purchased	(1,245,000)	(1,256,000)
Asset, fair value	17,806,000	23,466,000
Liabilities, fair value	(1,245,000)	(1,256,000)
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | Common and preferred stock
Assets and liabilities measured at fair value on a recurring basis
Total securities available-for-sale	6,483,000	11,902,000
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | Common stock warrants
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	1,517,000	1,066,000
Recurring basis | Significant Other Observable Inputs (Level 2)
Assets and liabilities measured at fair value on a recurring basis
Total securities available-for-sale	674,331,000	737,318,000
Other securities, at estimated fair value	23,355,000	16,893,000
Securities, at estimated fair value	697,686,000	754,211,000
Corporate loans, at estimated fair value		3,176,000
Equity investments, at estimated fair value	34,335,000	28,385,000
Asset, fair value	747,353,000	793,143,000
Liabilities, fair value	(107,902,000)	(120,119,000)
Recurring basis | Significant Other Observable Inputs (Level 2) | Corporate debt securities
Assets and liabilities measured at fair value on a recurring basis
Total securities available-for-sale	674,331,000	736,010,000
Recurring basis | Significant Other Observable Inputs (Level 2) | Common and preferred stock
Assets and liabilities measured at fair value on a recurring basis
Total securities available-for-sale		1,308,000
Recurring basis | Significant Other Observable Inputs (Level 2) | Commodity swaps
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	11,804,000	7,371,000
Derivative liability, fair value	(637,000)
Recurring basis | Significant Other Observable Inputs (Level 2) | Interest rate swaps
Assets and liabilities measured at fair value on a recurring basis
Derivative liability, fair value	(86,052,000)	(100,718,000)
Recurring basis | Significant Other Observable Inputs (Level 2) | Foreign exchange forward contracts
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	1,731,000
Derivative liability, fair value	(19,878,000)	(12,224,000)
Recurring basis | Significant Other Observable Inputs (Level 2) | Credit default swaps-protection sold
Assets and liabilities measured at fair value on a recurring basis
Derivative liability, fair value		(7,177,000)
Estimated Fair Value	116,000
Recurring basis | Significant Other Observable Inputs (Level 2) | Credit default swaps-protection purchased
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	1,681,000
Derivative liability, fair value	(1,335,000)
Recurring basis | Significant Unobservable Inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis
Total securities available-for-sale	71,506,000	67,233,000
Other securities, at estimated fair value	2,721,000	2,778,000
Residential mortgage-backed securities	87,363,000	86,479,000
Securities, at estimated fair value	161,590,000	156,490,000
Corporate loans, at estimated fair value	9,929,000
Equity investments, at estimated fair value	159,501,000	150,962,000
Asset, fair value	345,956,000	322,831,000
Liabilities, fair value	(262,000)
Recurring basis | Significant Unobservable Inputs (Level 3) | Corporate debt securities
Assets and liabilities measured at fair value on a recurring basis
Total securities available-for-sale	71,506,000	67,233,000
Recurring basis | Significant Unobservable Inputs (Level 3) | Total rate of return swaps
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	293,000	152,000
Recurring basis | Significant Unobservable Inputs (Level 3) | Foreign exchange options
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	12,416,000	13,394,000
Derivative liability, fair value	(262,000)
Recurring basis | Significant Unobservable Inputs (Level 3) | Common stock warrants
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	1,551,000	1,266,000
Recurring basis | Significant Unobservable Inputs (Level 3) | Other assets
Assets and liabilities measured at fair value on a recurring basis
Other assets	676,000	567,000
Recurring basis | Estimated Fair Value
Assets and liabilities measured at fair value on a recurring basis
Total securities available-for-sale	752,320,000	816,453,000
Other securities, at estimated fair value	26,076,000	19,671,000
Residential mortgage-backed securities	87,363,000	86,479,000
Securities, at estimated fair value	865,759,000	922,603,000
Corporate loans, at estimated fair value	9,929,000	3,176,000
Equity investments, at estimated fair value	203,642,000	189,845,000
Asset, fair value	1,111,115,000	1,139,440,000
Liabilities, fair value	(109,409,000)	(121,375,000)
Recurring basis | Estimated Fair Value | Corporate debt securities
Assets and liabilities measured at fair value on a recurring basis
Total securities available-for-sale	745,837,000	803,243,000
Recurring basis | Estimated Fair Value | Common and preferred stock
Assets and liabilities measured at fair value on a recurring basis
Total securities available-for-sale	6,483,000	13,210,000
Recurring basis | Estimated Fair Value | Total rate of return swaps
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	293,000	152,000
Recurring basis | Estimated Fair Value | Foreign exchange options
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	12,416,000	13,394,000
Derivative liability, fair value	(262,000)
Recurring basis | Estimated Fair Value | Commodity swaps
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	11,804,000	7,371,000
Derivative liability, fair value	(637,000)
Recurring basis | Estimated Fair Value | Common stock warrants
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	3,068,000	2,332,000
Recurring basis | Estimated Fair Value | Other assets
Assets and liabilities measured at fair value on a recurring basis
Other assets	676,000	567,000
Recurring basis | Estimated Fair Value | Securities sold, not yet purchased
Assets and liabilities measured at fair value on a recurring basis
Derivative liability, fair value	(1,245,000)	(1,256,000)
Recurring basis | Estimated Fair Value | Interest rate swaps
Assets and liabilities measured at fair value on a recurring basis
Derivative liability, fair value	(86,052,000)	(100,718,000)
Recurring basis | Estimated Fair Value | Foreign exchange forward contracts
Assets and liabilities measured at fair value on a recurring basis
Derivative asset, fair value	1,731,000
Derivative liability, fair value	(19,878,000)	(12,224,000)
Recurring basis | Estimated Fair Value | Credit default swaps-protection sold
Assets and liabilities measured at fair value on a recurring basis
Derivative liability, fair value		(7,177,000)
Recurring basis | Estimated Fair Value | Credit default swaps-protection purchased
Assets and liabilities measured at fair value on a recurring basis
Derivative liability, fair value	(1,335,000)
Non-recurring basis | Significant Other Observable Inputs (Level 2)
Assets and liabilities measured at fair value on a recurring basis
Loans held for sale	83,715,000	159,120,000
Asset, fair value		159,120,000
Non-recurring basis | Significant Unobservable Inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis
Loans held for sale	26,825,000	6,698,000
Private equity investments, at cost		780,000
Asset, fair value		7,478,000
Non-recurring basis | Estimated Fair Value
Assets and liabilities measured at fair value on a recurring basis
Loans held for sale	110,540,000	165,818,000
Private equity investments, at cost		780,000
Asset, fair value		$ 166,598,000

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Borrowings (Details) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2012	Dec. 31, 2011
Details of Company's borrowings
Senior notes	$ 362,109,000	$ 250,676,000
Credit facilities	66,800,000	38,300,000
Convertible senior notes	277,091,000	299,830,000
Junior subordinated notes	283,517,000	283,517,000
Total borrowings	6,833,860,000	6,778,208,000
Credit facilities, fair value of collateral	160,350,000	86,874,000
Fair Value of Collateral	6,671,672,000	6,934,222,000
Nonaffiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	5,496,488,000	5,540,037,000
Collateralized loan obligation secured debt, fair value of collateral	6,123,914,000	6,437,371,000
Affiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	347,855,000	365,848,000
Collateralized loan obligation secured debt, fair value of collateral	387,408,000	409,977,000
CLO 2005-1 senior secured notes
Details of Company's borrowings
Collateralized loan obligation secured debt	697,551,000	715,354,000
Weighted Average Borrowing Rate (as a percent)	0.89%	0.75%
Weighted Average Remaining Maturity (in days)	1852 days	1943 days
Collateralized loan obligation secured debt, fair value of collateral	681,388,000	798,876,000
CLO 2005-2 senior secured notes
Details of Company's borrowings
Collateralized loan obligation secured debt	700,159,000	745,226,000
Weighted Average Borrowing Rate (as a percent)	0.81%	0.83%
Weighted Average Remaining Maturity (in days)	2066 days	2157 days
Collateralized loan obligation secured debt, fair value of collateral	763,051,000	870,712,000
CLO 2006-1 senior secured notes
Details of Company's borrowings
Collateralized loan obligation secured debt	683,265,000	683,265,000
Weighted Average Borrowing Rate (as a percent)	0.86%	0.87%
Weighted Average Remaining Maturity (in days)	2338 days	2429 days
Collateralized loan obligation secured debt, fair value of collateral	866,266,000	884,873,000
CLO 2007-1 senior secured notes
Details of Company's borrowings
Collateralized loan obligation secured debt	2,075,040,000	2,075,040,000
Weighted Average Borrowing Rate (as a percent)	1.05%	1.01%
Weighted Average Remaining Maturity (in days)	3332 days	3423 days
Collateralized loan obligation secured debt, fair value of collateral	2,328,919,000	2,343,420,000
CLO 2007-1 junior secured notes | Nonaffiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	111,476,000	61,491,000
Weighted Average Remaining Maturity (in days)	3332 days	3423 days
Collateralized loan obligation secured debt, fair value of collateral	125,115,000	69,444,000
CLO 2007-1 junior secured mezzanine notes | Nonaffiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	105,700,000	55,700,000
Weighted Average Borrowing Rate (as a percent)	3.20%	3.70%
CLO 2007-1 junior secured subordinated notes | Nonaffiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	5,800,000	5,800,000
CLO 2007-A senior secured notes
Details of Company's borrowings
Collateralized loan obligation secured debt	786,763,000	812,318,000
Weighted Average Borrowing Rate (as a percent)	1.53%	1.36%
Weighted Average Remaining Maturity (in days)	2024 days	2115 days
Collateralized loan obligation secured debt, fair value of collateral	846,882,000	900,660,000
CLO 2007-A junior secured notes | Nonaffiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	10,821,000	10,821,000
Weighted Average Remaining Maturity (in days)	2024 days	2115 days
Collateralized loan obligation secured debt, fair value of collateral	11,648,000	11,997,000
CLO 2007-A junior secured mezzanine notes | Nonaffiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	6,200,000	6,200,000
Weighted Average Borrowing Rate (as a percent)	7.30%	7.10%
CLO 2007-A junior secured subordinated notes | Nonaffiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	4,600,000	4,600,000
CLO 2007-1 junior secured notes to affiliates | Affiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	282,403,000	300,396,000
Weighted Average Remaining Maturity (in days)	3332 days	3423 days
Collateralized loan obligation secured debt, fair value of collateral	316,955,000	337,407,000
CLO 2007-1 junior secured mezzanine notes to affiliates | Affiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	152,100,000	170,100,000
Weighted Average Borrowing Rate (as a percent)	5.70%	5.30%
CLO 2007-1 junior secured subordinated notes to affiliates | Affiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	130,300,000	130,300,000
CLO 2007-A junior secured notes to affiliates | Affiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	65,452,000	65,452,000
Weighted Average Remaining Maturity (in days)	2024 days	2115 days
Collateralized loan obligation secured debt, fair value of collateral	70,453,000	72,570,000
CLO 2007-A junior secured mezzanine notes to affiliates | Affiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	55,000,000	55,000,000
Weighted Average Borrowing Rate (as a percent)	6.70%	6.60%
CLO 2007-A junior secured subordinated notes to affiliates | Affiliates
Details of Company's borrowings
Collateralized loan obligation secured debt	10,500,000	10,500,000
CLO 2011-1 senior debt
Details of Company's borrowings
Collateralized loan obligation secured debt	431,413,000	436,522,000
Weighted Average Borrowing Rate (as a percent)	1.91%	1.77%
Weighted Average Remaining Maturity (in days)	2328 days	2419 days
Collateralized loan obligation secured debt, fair value of collateral	500,645,000	557,389,000
2014 Facility
Details of Company's borrowings
Weighted Average Borrowing Rate (as a percent)	3.72%	3.83%
Weighted Average Remaining Maturity (in days)	763 days	854 days
2015 Natural Resources Facility
Details of Company's borrowings
Weighted Average Borrowing Rate (as a percent)	2.87%	2.53%
Credit facilities	66,800,000	38,300,000
Weighted Average Remaining Maturity (in days)	1314 days	1405 days
Credit facilities, fair value of collateral	160,350,000	86,874,000
Approximate aggregate purchase price of oil and gas properties provided as collateral	158,900,000	89,100,000
Carrying amount of oil and gas assets	160,400,000	86,900,000
7.0% convertible senior notes
Details of Company's borrowings
Weighted Average Borrowing Rate (as a percent)	7.00%	7.00%
Convertible senior notes	112,036,000	135,086,000
Weighted Average Remaining Maturity (in days)	106 days	197 days
7 500% convertible senior notes
Details of Company's borrowings
Weighted Average Borrowing Rate (as a percent)	7.50%	7.50%
Convertible senior notes	165,055,000	164,744,000
Weighted Average Remaining Maturity (in days)	1751 days	1842 days
8 375% Senior Notes due November 15, 2041
Details of Company's borrowings
Senior notes	250,690,000	250,676,000
Weighted Average Borrowing Rate (as a percent)	8.38%	8.38%
Weighted Average Remaining Maturity (in days)	10821 days	10912 days
7 500% senior notes due March 20, 2042
Details of Company's borrowings
Senior notes	111,419,000
Weighted Average Borrowing Rate (as a percent)	7.50%
Weighted Average Remaining Maturity (in days)	10946 days
Junior subordinated notes.
Details of Company's borrowings
Weighted Average Borrowing Rate (as a percent)	5.54%	5.48%
Junior subordinated notes	$ 283,517,000	$ 283,517,000
Weighted Average Remaining Maturity (in days)	8987 days	9078 days

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Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2012

Fair Value of Financial Instruments

Schedule of carrying value and estimated fair value of financial instruments

	As of March 31, 2012				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash, restricted cash, and cash equivalents	$	1,350,796	$	1,350,796	$	—	$	1,350,796	$	—
Securities available-for-sale	752,320		752,320		6,483		674,331		71,506
Other securities, at estimated fair value	26,076		26,076		—		23,355		2,721
Residential mortgage-backed securities	87,363		87,363		—		—		87,363
Corporate loans, net of allowance for loan losses of $235,807 as of March 31, 2012	5,665,306		5,723,022		—		5,143,183		579,839
Corporate loans held for sale	297,708		361,764		—		323,774		37,990
Corporate loans, at estimated fair value	9,929		9,929		—		—		9,929
Equity investments, at estimated fair value	203,642		203,642		9,806		34,335		159,501
Interest and principal receivable	38,336		38,336		—		38,336		—
Derivative assets	31,109		31,109		1,517		15,332		14,260
Private equity investments, at cost	780		915		—		—		915
Financial Liabilities:
Collateralized loan obligation secured debt	$	5,496,488	$	5,217,556	$	—	$	—	$	5,217,556
Collateralized loan obligation junior secured notes to affiliates	347,855		292,723		—		—		292,723
Credit facilities	66,800		66,800		—		—		66,800
Convertible senior notes	277,091		357,255		—		357,255		—
Senior notes	362,109		389,310		389,310		—		—
Junior subordinated notes	283,517		256,937		—		—		256,937
Accounts payable, accrued expenses and other liabilities	34,080		34,080		—		34,080		—
Accrued interest payable	20,659		20,659		—		20,659		—
Accrued interest payable to affiliates	7,102		7,102		—		7,102		—
Related party payable	16,827		16,827		—		16,827		—
Securities sold, not yet purchased	1,245		1,245		1,245		—		—
Derivative liabilities	108,164		108,164		—		107,902		262

	As of December 31, 2011
	Carrying Amount		Estimated Fair Value
Financial Assets:
Cash, restricted cash, and cash equivalents	$	791,774	$	791,774
Securities available-for-sale	816,453		816,453
Other securities, at estimated fair value	19,671		19,671
Residential mortgage-backed securities	86,479		86,479
Corporate loans, net of allowance for loan losses of $191,407 as of December 31, 2011	6,122,891		5,999,771
Corporate loans held for sale	317,332		359,463
Corporate loans, at estimated fair value	3,176		3,176
Equity investments, at estimated fair value	189,845		189,845
Interest and principal receivable	62,124		62,124
Derivative assets	28,463		28,463
Private equity investments, at cost	780		780
Financial Liabilities:
Collateralized loan obligation secured debt	$	5,540,037	$	5,200,534
Collateralized loan obligation junior secured notes to affiliates	365,848		283,914
Credit facilities	38,300		38,300
Convertible senior notes	299,830		368,502
Senior notes	250,676		261,834
Junior subordinated notes	283,517		262,962
Accounts payable, accrued expenses and other liabilities	23,424		23,424
Accrued interest payable	25,536		25,536
Accrued interest payable to affiliates	6,561		6,561
Related party payable	11,078		11,078
Securities sold, not yet purchased	1,256		1,256
Derivative liabilities	125,333		125,333

Schedule of fair value of assets and liabilities measured on a recurring basis

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Balance as of March 31,2012
Assets:
Securities available-for-sale:
Corporate debt securities	$	—		$	674,331		$	71,506		$	745,837
Common and preferred stock	6,483			—			—			6,483
Total securities available-for-sale	6,483			674,331			71,506			752,320
Other securities, at estimated fair value	—			23,355			2,721			26,076
Residential mortgage-backed securities	—			—			87,363			87,363
Total securities	6,483			697,686			161,590			865,759
Corporate loans, at estimated fair value	—			—			9,929			9,929
Equity investments, at estimated fair value	9,806			34,335			159,501			203,642
Total rate of return swaps	—			—			293			293
Foreign exchange options	—			—			12,416			12,416
Commodity swaps	—			11,804			—			11,804
Common stock warrants	1,517			—			1,551			3,068
Foreign exchange forward contracts	—			1,731			—			1,731
Credit default swaps—protection purchased	—			1,681			—			1,681
Credit default swaps—protection sold	—			116			—			116
Other assets	—			—			676			676
Total	$	17,806		$	747,353		$	345,956		$	1,111,115
Liabilities:
Securities sold, not yet purchased	$	(1,245	)	$	—		$	—		$	(1,245	)
Cash flow interest rate swaps	—			(86,052		)	—			(86,052		)
Foreign exchange forward contracts	—			(19,878		)	—			(19,878		)
Credit default swaps—protection purchased	—			(1,335		)	—			(1,335		)
Commodity swaps	—			(637		)	—			(637		)
Foreign exchange options	—			—			(262		)	(262		)
	$	(1,245	)	$	(107,902	)	$	(262	)	$	(109,409	)

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2011
Assets:
Securities available-for-sale:
Corporate debt securities	$	—		$	736,010		$	67,233	$	803,243
Common and preferred stock	11,902			1,308			—		13,210
Total securities available-for-sale	11,902			737,318			67,233		816,453
Other securities, at estimated fair value	—			16,893			2,778		19,671
Residential mortgage-backed securities	—			—			86,479		86,479
Total securities	11,902			754,211			156,490		922,603
Corporate loans, at estimated fair value	—			3,176			—		3,176
Equity investments, at estimated fair value	10,498			28,385			150,962		189,845
Total rate of return swaps	—			—			152		152
Foreign exchange options, net	—			—			13,394		13,394
Commodity swaps, net	—			7,371			—		7,371
Common stock warrants	1,066			—			1,266		2,332
Other assets	—			—			567		567
Total	$	23,466		$	793,143		$	322,831	$	1,139,440
Liabilities:
Securities sold, not yet purchased	$	(1,256	)	$	—		$	—	$	(1,256	)
Cash flow interest rate swaps	—			(100,718		)	—		(100,718		)
Foreign exchange forward contracts, net	—			(12,224		)	—		(12,224		)
Credit default swaps—protection sold, net	—			(7,177		)	—		(7,177		)
	$	(1,256	)	$	(120,119	)	$	—	$	(121,375	)

Schedule of fair value of assets measured on a non-recurring basis

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of March 31, 2012
Corporate loans held for sale(1)	$	—	$	83,715	$	26,825	$	110,540

(1)As of March 31, 2012, total loans held for sale had a carrying value of $297.7 million of which $110.5 million was carried at estimated fair value and the remaining $187.2 million carried at amortized cost. Of the $110.5 million carried at estimated fair value, $83.7 million was classified as Level 2 given that the assets were valued using quoted prices and other observable inputs in an active market. The remaining $26.8 million was classified as Level 3 given that the Company applied unobservable inputs based on the best available information to determine the estimated fair value.

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2011
Loans held for sale(1)	$	—	$	159,120	$	6,698	$	165,818
Private equity investments(2)	—		—		780		780
Total	$	—	$	159,120	$	7,478	$	166,598

(1)As of December 31, 2011, total loans held for sale had a carrying value of $317.3 million of which $165.8 million was carried at estimated fair value and the remaining $151.5 million carried at amortized cost. Of the $165.8 million carried at estimated fair value, $159.1 million was classified as Level 2 given that the assets were valued using quoted prices and other observable inputs in an active market. The remaining $6.7 million was classified as Level 3 given that the Company applied unobservable inputs based on the best available information to determine the estimated fair value.

(2)Represents private equity investments accounted for under the cost method that were classified as Level 3 when the assets were impaired and measured at estimated fair value using unobservable inputs.

Schedule of additional information of assets measured on level 3 basis

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value			Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value		Total Rate of Return Swaps		Common Stock Warrants		Foreign Exchange Options, Net			Other Assets
Beginning balance as of January 1, 2012	$	67,233		$	2,778		$	86,479		$	—	$	150,962	$	152	$	1,266	$	13,394		$	567
Total gains or losses (for the period):
Included in earnings(1)	550			(57		)	2,436			1,314		2,388		141		285		(1,240		)	109
Included in other comprehensive income	4,051			—			—			—		—		—		—		—			—
Transfers into Level 3(2)	—			—			—			—		—		—		—		—			—
Transfers out of Level 3(2)	—			—			—			—		—		—		—		—			—
Purchases	—			—			—			8,615		6,151		—		—		—			—
Sales	—			—			—			—		—		—		—		—			—
Settlements	(328		)	—			(1,552		)	—		—		—		—		—
Ending balance as of March 31, 2012	$	71,506		$	2,721		$	87,363		$	9,929	$	159,501	$	293	$	1,551	$	12,154		$	676
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	550		$	(57	)	$	7,798		$	1,314	$	2,388	$	141	$	285	$	(1,240	)	$	109

(1)Amounts are included in net realized and unrealized gain on investments, net realized and unrealized gain on derivatives and foreign exchange or net realized and unrealized gain (loss) on residential mortgage-backed securities, at estimated fair value in the condensed consolidated statements of operations.

(2)There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

	Securities Available- For-Sale			Residential Mortgage- Backed Securities			Equity Investments, at Estimated Fair Value		Total Rate of Return Swaps		Common Stock Warrants		Foreign Exchange Options, Net		Other Assets
Beginning balance as of January 1, 2011	$	83,097		$	93,929		$	84,932	$	104	$	3,453	$	14,791	$	—
Total gains or losses (realized and unrealized):
Included in earnings(1)	239			(1,660		)	24,462		31		718		1,682		—
Included in other comprehensive income	3,450			—			—		—		—		—		—
Transfers into Level 3(2)	12,986			—			—		—		—		—		—
Purchases	1,816			—			17,424		—		—		—		—
Sales	(1,665		)	—			—		—		—		—		—
Settlements	6,509			(1,900		)	9,723		—		—		—		750
Ending balance as of March 31, 2011	$	106,432		$	90,369		$	136,541	$	135	$	4,171	$	16,473	$	750
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date(1)	$	—		$	5,895		$	24,462	$	—	$	718	$	1,682	$	—

(1)Amounts are included in net realized and unrealized gain on investments, net realized and unrealized gain on derivatives and foreign exchange or net realized and unrealized gain (loss) on residential mortgage-backed securities, at estimated fair value in the condensed consolidated statements of operations.

(2)Certain securities available-for-sale and equity investments, at estimated fair value, were transferred into Level 3 reflecting reduced transparency of prices for these financial instruments as a result of less trading activity. There were no significant transfers out of Level 3 into Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

Summary of valuation techniques used for assets, measured at fair value and categorized within level 3

	Balance as of March 31, 2012			Valuation Techniques (1)	Unobservable Inputs (2)	Range (Weighted Average) (3)	Impact to Valuation from an Increase in Input (4)
Assets:
Securities available-for-sale: Corporate debt securities	$	71,506		Market comparables	Yield Discount margin Total leverage Illiquidity discount	8%-25% (15%) 600bps-2400bps (1400bps) 1x-6x (3x) 2%-7% (4%)	Decrease Decrease Decrease Decrease
				Discounted cash flows	Weighted average cost of capital	12% (12%)	Decrease
				Broker quotes	Offered quotes	60-103 (84)	Increase
Other securities, at estimated fair value	$	2,721		Market comparables	Yield	11% (11%)	Decrease
Residential mortgage-backed securities	$	87,363		Discounted cash flows	Probability of default Loss severity Constant prepayment rate	0%-32% (11%) 24%-80% (33%) 0%-35% (13%)	Decrease Decrease (5)
Corporate loans, at estimated fair value	$	9,929		Market comparables	Yield Discount margin Illiquidity discount	39% (39%) 3772bps (3772bps) 20% (20%)	Decrease Decrease Decrease
Equity investments, at estimated fair value	$	159,501		Market comparables	LTM EBITDA multiple Forward EBITDA multiple Control premium	7x-14x (10x) 6x-12x (9x) 25% (25%)	Increase Increase Increase
				Discounted cash flows	Weighted average cost of capital Exit multiple LTM EBITDA	8%-15% (11%) 6x-11x (8x)	Decrease Increase
Total rate of return swaps (6)	$	293		—	—	—	—
Common stock warrants	$	1,551		Market comparables	LTM EBITDA multiple Forward EBITDA multiple	6.2x (6.2x) 6.1x (6.1x)	Increase Increase
				Discounted cash flows	Weighted average cost of capital Exit multiple LTM EBITDA	11% (11%) 6.1x (6.1x)	Decrease Increase
Foreign exchange options	$	12,416		Option pricing model	Forward and spot rates	0.02-1.42 (1.36)	(7)
Other assets	$	676		Broker quotes	Offered quotes	0.09-1.80 (0.76)	Increase
Liabilities:
Foreign exchange options	$	(262	)	Option pricing model	Forward and spot rates	0.02 (0.02)	(7)

(1)  For the assets that have more than one valuation technique, the Company may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. Broker quotes obtained for valuation purposes are reviewed by the Company through other valuation techniques. Equity investments, at estimated fair value are assigned a minimum 5% illiquidity discount, with the exception of certain investments related to natural resources.

(2)  The significant unobservable inputs used in the fair value measurement of the Company’s assets and liabilities may include the last twelve months (“LTM”) earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a variety of factors including economic, industry and market trends and developments; market valuations of comparable companies; and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement.

(3) Weighted average amounts are based on the estimated fair values.

(4) Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

(5) Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6) Note that this amount represents the accrued interest on the unsettled unwind of the total rate of return swaps.

(7) The directional change from an increase in forward and spot rates varies and is dependent on the specific option.

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Segment Reporting (Tables)

3 Months Ended

Mar. 31, 2012

Segment Reporting

Schedule showing data of reportable segments reconciled to amounts reflected in the consolidated financial statements

For the three months	Credit				Other					Reconciling Items						Consolidated Company
ended March 31,	2012		2011		2012		2011			2012			2011			2012		2011
Total investment income	$	126,881	$	132,424	$	11,053	$	2,906		$	—		$	—		$	137,934	$	135,330
Net investment income	$	27,280	$	76,707	$	10,582	$	2,745		$	—		$	—		$	37,862	$	79,452
Other income (loss)	$	74,197	$	46,720	$	4,734	$	(284	)	$	—		$	—		$	78,931	$	46,436
Net income (loss)	$	92,758	$	112,282	$	6,497	$	(142	)	$	(11,207	)	$	(18,373	)	$	88,048	$	93,767

The following table shows total assets of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	Credit				Other(1)				Reconciling Items				Consolidated Company
As of	March 31,2012		December 31, 2011		March 31,2012		December 31, 2011		March 31, 2012		December 31, 2011		March 31,2012		December  31, 2011
Total assets	$	8,524,160	$	8,487,702	$	247,442	$	158,639	$	588	$	887	$	8,772,190	$	8,647,228

(1)Consists primarily of natural resources assets, which are included in other assets on our condensed consolidated balance sheets.

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Organization

3 Months Ended

Mar. 31, 2012

Organization

Organization

Note 1. Organization

KKR Financial Holdings LLC together with its subsidiaries (the “Company”) is a specialty finance company with expertise in a range of asset classes. The Company’s core business strategy is to leverage the proprietary resources of its manager with the objective of generating both current income and capital appreciation by deploying capital to its strategies, which include bank loans and high yield securities, natural resources, special situations, mezzanine, commercial real estate and private equity. The Company’s holdings across these strategies primarily consist of below investment grade syndicated corporate loans, also known as leveraged loans, high yield debt securities, private equity and working and royalty interests in oil and gas properties. The corporate loans that the Company holds are purchased via assignment or participation in the primary or secondary market.

The majority of the Company’s holdings consist of corporate loans and high yield debt securities held in collateralized loan obligation (“CLO”) transactions that are structured as on-balance sheet securitizations and are used as long term financing for the Company’s investments in corporate debt. The senior secured debt issued by the CLO transactions is generally owned by unaffiliated third party investors and the Company owns the majority of the mezzanine and subordinated notes in the CLO transactions. The Company executes its core business strategy through its majority-owned subsidiaries, including CLOs.

KKR Financial Advisors LLC (the “Manager”), a wholly-owned subsidiary of KKR Asset Management LLC, manages the Company pursuant to a management agreement (the “Management Agreement”). KKR Asset Management LLC is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P. (“KKR”).

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Summary of Significant Accounting Policies (Details) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Nonaffiliates
Collateralized Debt Obligation disclosures
Aggregate secured outstanding debt related to CLOs, held by third parties	$ 5,496,488,000	$ 5,540,037,000
Affiliates
Collateralized Debt Obligation disclosures
Aggregate secured outstanding debt related to CLOs, held by third parties	347,855,000	365,848,000
Collateralized Debt Obligation (CLOs) VIEs
Collateralized Debt Obligation disclosures
Number of Collateralized Loan Obligation (CLOs) VIEs	6	6
Corporate debt investment, par amount	6,900,000,000	7,400,000,000
Estimated fair value of corporate debt instruments	6,500,000,000	6,800,000,000
Collateralized Debt Obligation (CLOs) VIEs | Nonaffiliates
Collateralized Debt Obligation disclosures
Aggregate secured outstanding debt related to CLOs, held by third parties	5,500,000,000	5,500,000,000
Collateralized Debt Obligation (CLOs) VIEs | Affiliates
Collateralized Debt Obligation disclosures
Aggregate secured outstanding debt related to CLOs, held by third parties	$ 347,900,000	$ 365,800,000

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Corporate Loans and Allowance for Loan Losses (Details 4) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011	Mar. 31, 2011	Dec. 31, 2010
Corporate Loans and Allowance for Loan Losses
Recorded Investment	$ 5,917,667	$ 6,334,232
Allowances for loan losses, unallocated	235,807	191,407	198,582	209,030
Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	5,848,639	6,265,540
Allowances for loan losses, unallocated	201,300	157,600
Allocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	69,028	68,692
High | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	1,082,642	1,251,621
High | Senior Secured Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	777,054	926,258
High | Second Lien Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	295,239	310,971
High | Subordinated | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	10,349	14,392
Moderate | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	585,694	652,890
Moderate | Senior Secured Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	585,694	645,939
Moderate | Subordinated | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment		6,951
Low | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	4,180,303	4,361,029
Low | Senior Secured Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	4,011,616	4,184,094
Low | Second Lien Loan | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	126,238	65,695
Low | Subordinated | Unallocated
Corporate Loans and Allowance for Loan Losses
Recorded Investment	$ 42,449	$ 111,240

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Management Agreement and Related Party Transactions (Details) (USD $)			3 Months Ended
	Mar. 31, 2012	Dec. 31, 2011	Mar. 31, 2012 Manager multiplier	Mar. 31, 2012 Manager Base Management Fees and Manager Share-based Compensation	Mar. 31, 2011 Manager Base Management Fees and Manager Share-based Compensation	Sep. 30, 2007 Manager Base Management Fees and Manager Share-based Compensation	Mar. 31, 2012 Manager Incentive Fees	Mar. 31, 2011 Manager Incentive Fees	Mar. 31, 2012 Manager CLO Management Fees	Mar. 31, 2011 Manager CLO Management Fees	Mar. 31, 2012 Manager Reimbursable General and Administrative Expenses	Mar. 31, 2011 Manager Reimbursable General and Administrative Expenses
Management Agreement and Related Party Transactions
Renewal period (in years)			1 year
Votes for termination, minimum (as a percent)			66.70%
Notice period for termination (in days)			180 days
Multiplier used to determine termination fee			4
Number of 12 month periods considered for calculation of termination fee			2
Specified period for which average annual incentive fee to be considered (in months)			12 months
Expenses recognized by the Company or earned by the manager				$ 7,000,000	$ 6,200,000		$ 9,700,000	$ 12,000,000	$ 1,100,000	$ 1,300,000	$ 2,000,000	$ 1,700,000
Payable to manager	16,827,000	11,078,000		2,400,000			9,700,000
Expenses recognized for restricted common shares granted				400,000	1,600,000
Common shares offering						230,400,000
Common share right offering						270,000,000
Common share closing price, minimum (in dollars per share)						$ 20.00
Number of consecutive trading days						5 days
Fees, waived				$ 2,200,000	$ 2,200,000				$ 8,300,000	$ 8,800,000

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Assets
Cash and cash equivalents	$ 526,846	$ 392,154
Restricted cash and cash equivalents	823,950	399,620
Securities	865,759	922,603
Corporate loans, net (includes $297,708 and $317,332 loans held for sale as of March 31, 2012 and December 31, 2011, respectively)	5,972,943	6,443,399
Equity investments, at estimated fair value ($15,528 and $12,222 pledged as collateral as of March 31, 2012 and December 31, 2011, respectively)	203,642	189,845
Derivative assets	31,109	28,463
Interest and principal receivable	38,336	62,124
Other assets	309,605	209,020
Total assets	8,772,190	8,647,228
Liabilities
Credit facilities	66,800	38,300
Convertible senior notes	277,091	299,830
Senior notes	362,109	250,676
Junior subordinated notes	283,517	283,517
Accounts payable, accrued expenses and other liabilities	35,325	24,680
Related party payable	16,827	11,078
Derivative liabilities	108,164	125,333
Total liabilities	7,021,937	6,971,396
Shareholders' Equity
Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding at March 31, 2012 and December 31, 2011	0	0
Common shares, no par value, 500,000,000 shares authorized, and 178,393,521 and 178,145,482 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively	0	0
Paid-in-capital	2,759,996	2,759,478
Accumulated other comprehensive loss	(3,380)	(35,619)
Accumulated deficit	(1,006,363)	(1,048,027)
Total shareholders' equity	1,750,253	1,675,832
Total liabilities and shareholders' equity	8,772,190	8,647,228
Affiliates
Liabilities
Collateralized loan obligation secured debt	347,855	365,848
Accrued interest payable	7,102	6,561
Nonaffiliates
Liabilities
Collateralized loan obligation secured debt	5,496,488	5,540,037
Accrued interest payable	$ 20,659	$ 25,536

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Borrowings (Details 2) (USD $)	3 Months Ended					1 Months Ended	3 Months Ended			3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011	Mar. 31, 2011 CLO 2007-A senior secured notes	Mar. 31, 2012 CLO 2011-1 senior debt	Mar. 31, 2011 CLO 2011-1 senior debt	Jul. 31, 2011 CLO 2011-1 senior loan amendment	Mar. 31, 2012 CLO 2011-1 senior loan amendment	Dec. 31, 2011 CLO 2011-1 senior loan amendment	Jul. 06, 2011 CLO 2011-1 senior loan amendment	Mar. 31, 2012 CLO 2007-A, CLO 2005-1 and CLO 2005-2 senior notes	Mar. 31, 2012 CLO 2007-1 Class D secured notes
Details of Company's borrowings
Collateralized loan obligation secured debt repaid	$ 93,888,000	$ 110,426,000	$ 110,400,000	$ 5,100,000						$ 88,800,000
Maximum borrowing capacity					400,000,000				600,000,000
Current borrowing capacity under line of credit facility					300,000,000				450,000,000
Debt, variable interest rate basis							3-month LIBOR
Percentage of margin added to reference rate to determine interest rate on debt							1.35%
Amount outstanding							431,400,000	436,500,000
Proceeds from convertible senior notes											31,900,000
Increase in current borrowing capacity						150,000,000
Par value of notes issued											$ 42,000,000

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Condensed Consolidated Statements of Changes in Shareholders' Equity (USD $) In Thousands, except Share data, unless otherwise specified	Total USD ($)	Common Shares	Paid-In Capital USD ($)	Accumulated Other Comprehensive Loss USD ($)	Accumulated Deficit USD ($)
Balance at Dec. 31, 2011	$ 1,675,832		$ 2,759,478	$ (35,619)	$ (1,048,027)
Balance (in shares) at Dec. 31, 2011	178,145,482	178,145,000
Increase (Decrease) in Shareholders' Equity
Net income	88,048				88,048
Other comprehensive income	32,239			32,239
Cash distributions on common shares	(46,384)				(46,384)
Grant of restricted common shares (in shares)		259,000
Repurchase and cancellation of common shares	(96)		(96)
Repurchase and cancellation of common shares (in shares)		(10,000)
Share-based compensation expense related to restricted common shares	614		614
Balance at Mar. 31, 2012	$ 1,750,253		$ 2,759,996	$ (3,380)	$ (1,006,363)
Balance (in shares) at Mar. 31, 2012	178,393,521	178,394,000

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Fair Value of Financial Instruments (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Securities Available-For-Sale: Corporate Debt Securities
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	$ 67,233	$ 83,097
Total gain or losses (for the period)
Included in earnings	550	239
Included in other comprehensive income	4,051	3,450
Transfers into Level 3		12,986
Purchases		1,816
Sales		(1,665)
Settlements	(328)	6,509
Balance at the end of the period	71,506	106,432
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	550
Other Securities, at Estimated Fair Value
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	2,778
Total gain or losses (for the period)
Included in earnings	(57)
Balance at the end of the period	2,721
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	(57)
Residential mortgage-backed securities, at estimated fair value
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	86,479	93,929
Total gain or losses (for the period)
Included in earnings	2,436	(1,660)
Settlements	(1,552)	(1,900)
Balance at the end of the period	87,363	90,369
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	7,798	5,895
Corporate Loans, at Estimated Fair Value
Total gain or losses (for the period)
Included in earnings	1,314
Purchases	8,615
Balance at the end of the period	9,929
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	1,314
Equity investments, at estimated fair value
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	150,962	84,932
Total gain or losses (for the period)
Included in earnings	2,388	24,462
Purchases	6,151	17,424
Settlements		9,723
Balance at the end of the period	159,501	136,541
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	2,388	24,462
Total rate of return swaps
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	152	104
Total gain or losses (for the period)
Included in earnings	141	31
Balance at the end of the period	293	135
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	141
Common stock warrants
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	1,266	3,453
Total gain or losses (for the period)
Included in earnings	285	718
Balance at the end of the period	1,551	4,171
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	285	718
Foreign exchange options
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	13,394	14,791
Total gain or losses (for the period)
Included in earnings	(1,240)	1,682
Balance at the end of the period	12,154	16,473
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	(1,240)	1,682
Other assets
Reconciliation of assets measured on Level 3 basis
Balance at the beginning of the period	567
Total gain or losses (for the period)
Included in earnings	109
Settlements		750
Balance at the end of the period	676	750
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$ 109

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Securities (Details) (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011	Dec. 31, 2011
Securities Available-for-Sale
Amortized Cost	$ 672,425,000		$ 754,204,000
Gross Unrealized Gains	87,532,000		75,886,000
Gross Unrealized Losses	(7,637,000)		(13,637,000)
Estimated Fair Value	752,320,000		816,453,000
Total Securities
Amortized Cost	896,902,000		980,173,000
Gross Unrealized Gains	96,394,000		83,243,000
Gross Unrealized Losses	(127,537,000)		(140,813,000)
Securities, at estimated fair value	865,759,000		922,603,000
Net realized gains and losses recognized on the sale of securities available for sale
Net realized gains from paydowns and restructurings	16,200,000	0
Redemption premium	800,000
Estimated fair value of securities pledged as collateral
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	663,534,000		710,734,000
Total	663,534,000		710,734,000
Corporate debt securities
Securities Available-for-Sale
Amortized Cost	667,095,000		741,438,000
Gross Unrealized Gains	86,379,000		75,442,000
Gross Unrealized Losses	(7,637,000)		(13,637,000)
Estimated Fair Value	745,837,000		803,243,000
Fair value on available for sale securities in a gross continuous unrealized loss position by the length of time
Less Than 12 months	102,509,000		252,467,000
12 Months or More	11,402,000		32,876,000
Total Estimated Fair Value	113,911,000		285,343,000
Unrealized losses on available for sale securities in a gross continuous unrealized loss position by the length of time
Less Than 12 months	(5,403,000)		(10,562,000)
12 months or More	(2,234,000)		(3,075,000)
Total Unrealized Losses	(7,637,000)		(13,637,000)
Other-than-temporary impairment loss	700,000	0
Net realized gains and losses recognized on the sale of securities available for sale
Gross realized gains	7,581,000	7,408,000
Gross realized losses		(72,000)
Net realized gains (losses)	7,581,000	7,336,000
Equity investments, at estimated fair value
Securities Available-for-Sale
Amortized Cost	5,330,000		12,766,000
Gross Unrealized Gains	1,153,000		444,000
Estimated Fair Value	6,483,000		13,210,000
Other securities, at estimated fair value
Total Securities
Amortized Cost	21,889,000		16,467,000
Gross Unrealized Gains	4,641,000		3,225,000
Gross Unrealized Losses	(454,000)		(21,000)
Securities, at estimated fair value	26,076,000		19,671,000
Residential mortgage-backed securities, at estimated fair value
Total Securities
Amortized Cost	202,588,000		209,502,000
Gross Unrealized Gains	4,221,000		4,132,000
Gross Unrealized Losses	(119,446,000)		(127,155,000)
Securities, at estimated fair value	$ 87,363,000		$ 86,479,000

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2012

Summary of Significant Accounting Policies

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from management’s estimates.

Consolidation

Consolidation

KKR Financial CLO 2005-1, Ltd. (“CLO 2005-1”), KKR Financial CLO 2005-2, Ltd. (“CLO 2005-2”), KKR Financial CLO 2006-1, Ltd. (“CLO 2006-1”), KKR Financial CLO 2007-1, Ltd. (“CLO 2007-1”), KKR Financial CLO 2007-A, Ltd. (“CLO 2007-A”) and KKR Financial CLO 2011-1, Ltd. (“CLO 2011-1”) are entities established to complete secured financing transactions. These entities are variable interest entities (“VIEs”) which the Company consolidates as the Company has determined it has the power to direct the activities that most significantly impact these entities’ economic performance and the Company has both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities. In CLO transactions, subordinated notes have the first risk of loss and conversely, the residual value upside of the transactions. These CLOs are considered non-recourse leverage to the Company.

The Company finances the majority of its corporate debt investments through its CLOs. As of March 31, 2012, the Company’s six CLOs, held $6.9 billion par amount, or $6.5 billion estimated fair value, of corporate debt investments. As of December 31, 2011, the Company’s six CLOs, held $7.4 billion par amount, or $6.8 billion estimated fair value, of corporate debt investments. The assets in each CLO can be used only to settle the debt of the related CLO. As of March 31, 2012, the aggregate CLO debt totaled $5.5 billion of secured debt outstanding held by unaffiliated third parties and $347.9 million of junior secured notes outstanding held by an affiliate of the Manager. As of December 31, 2011, the aggregate CLO debt totaled $5.5 billion of secured debt outstanding held by unaffiliated third parties and $365.8 million of junior secured notes outstanding held by an affiliate of the Manager.

In addition, the Company continues to consolidate all non-VIEs in which it holds a greater than 50 percent voting interest.

All inter-company balances and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:

Level 1:  Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets generally included in this category are equity securities listed in active markets.

Level 2:  Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value and certain financial instruments classified as derivatives.

Level 3:  Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset.

The types of assets and liabilities generally included in this category are certain corporate debt securities, certain corporate loans held for sale, certain equity investments at estimated fair value, residential mortgage-backed securities (“RMBS”) and certain financial instruments classified as derivatives.

A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which the Company recognizes at the end of the reporting period.

Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that the Company and others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, the Company does not require that fair value always be a predetermined point in the bid-ask range. The Company’s policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets the Company’s best estimate of fair value.

Depending on the relative liquidity in the markets for certain assets, the Company may transfer assets to Level 3 if it determines that observable quoted prices, obtained directly or indirectly, are not available. The valuation techniques used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.

Corporate Debt Securities:  Corporate debt securities are initially valued at transaction price and are subsequently valued using market data for similar instruments (e.g., recent transactions or broker quotes), comparisons to benchmark derivative indices or valuation models. Valuation models are based on discounted cash flow techniques, for which the key inputs are the amount and timing of expected future cash flows, market yields for such instruments and recovery assumptions. Inputs are determined based on relative value analyses, which incorporate similar instruments from similar issuers.

Equity Investments, at Estimated Fair Value:  Equity investments, at estimated fair value, are initially valued at transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on a market and income (discounted cash flow) approaches, in which various internal and external factors are considered. Factors include the price at which the investment was acquired, the nature of the investment, current market conditions, recent public market and private transactions for comparable securities, and financing transactions subsequent to the acquisition of the investment. The fair value recorded for a particular investment will generally be within the range suggested by the two approaches.

Over-the-counter (“OTC”) Derivative Contracts:  OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit standing of reference entities, and equity prices. The fair value of OTC derivative products can be modeled using a series of techniques, including closed-form analytic formulae, such as the Black-Scholes option-pricing model, and simulation models or a combination thereof. Many pricing models do not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, as is the case for generic interest rate swap and option contracts.

Residential Mortgage-Backed Securities, at Estimated Fair Value:  Residential mortgage-backed securities are initially valued at transaction price and are subsequently valued using industry recognized models (including Intex and Bloomberg) and data for similar instruments (e.g., nationally recognized pricing services or broker quotes). The most significant inputs to the valuation of these instruments are default and loss expectations and market credit spreads.

Valuation Process

The valuation process involved in Level 3 measurements for assets and liabilities is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The Company has a valuation committee, whose members consist of the Company’s Chief Executive Officer, Chief Financial Officer, General Counsel and certain other employees of the Manager. The Company’s valuation committee is responsible for coordinating and implementing the Company’s quarterly valuation process. For assets classified as Level 3, the investment professionals are responsible for documenting preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and model projections discussed above, among other factors. The Company engages an independent valuation firm to opine on its valuations for certain holdings over a specific dollar threshold. All valuations are approved by the Company’s valuation committee.

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash held in banks and highly liquid investments with original maturities of three months or less. Interest income earned on cash and cash equivalents is recorded in other investment income.

Restricted Cash and Cash Equivalents

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents represent amounts that are held by third parties under certain of the Company’s financing and derivative transactions. Interest income earned on restricted cash and cash equivalents is recorded in other investment income.

On the condensed consolidated statement of cash flows, net additions or reductions to restricted cash and cash equivalents are classified as an investing activity as restricted cash and cash equivalents reflect the receipts from collections or sales of investments, as well as payments made to acquire investments held by third parties.

Securities Available-for-Sale

Securities Available-for-Sale

The Company classifies its investments in securities as available-for-sale as the Company may sell them prior to maturity and does not hold them principally for the purpose of selling them in the near term. These investments are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive (loss) income. Estimated fair values are based on quoted market prices, when available, on estimates provided by independent pricing sources or dealers who make markets in such securities, or internal valuation models when external sources of fair value are not available. Upon the sale of a security, the realized net gain or loss is computed on a weighted average cost basis. Purchases and sales of securities are recorded on the trade date.

The Company monitors its available-for-sale securities portfolio for impairments. A loss is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. The Company considers many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost and the severity of the decline, the amount of the unrealized loss, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. In addition, for debt securities, the Company considers its intent to sell the debt security, the Company’s estimation of whether or not it expects to recover the debt security’s entire amortized cost if it intends to hold the debt security, and whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery. For equity securities, the Company also considers its intent and ability to hold the equity security for a period of time sufficient for a recovery in value.

The amount of the loss that is recognized when it is determined that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary is dependent on certain factors. If the security is an equity security or if the security is a debt security that the Company intends to sell or estimates that it is more likely than not that the Company will be required to sell before recovery of its amortized cost, then the impairment amount recognized in earnings is the entire difference between the estimated fair value of the security and its amortized cost. For debt securities that the Company does not intend to sell or estimates that it is not more likely than not to be required to sell before recovery, the impairment is separated into the estimated amount relating to credit loss and the estimated amount relating to all other factors. Only the estimated credit loss amount is recognized in earnings, with the remainder of the loss amount recognized in other comprehensive (loss) income.

Unamortized premiums and unaccreted discounts on securities available-for-sale are recognized in interest income over the contractual life, adjusted for actual prepayments, of the securities using the effective interest method.

Other Securities, at Estimated Fair Value

Other Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain securities for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these securities. Other securities, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in income.

Residential Mortgage-Backed Securities, at Estimated Fair Value

Residential Mortgage-Backed Securities, at Estimated Fair Value

The Company has elected the fair value option of accounting for its residential mortgage investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of its residential mortgage investments. RMBS, at estimated fair value are included within securities on the condensed consolidated balance sheets with unrealized gains and losses reported in income.

Equity Investments, at Estimated Fair Value

Equity Investments, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain marketable equity securities and private equity investments. The Company elects the fair value option of accounting for private equity investments received through restructuring debt transactions or issued by an entity in which the Company may have significant influence. The Company elected the fair value option for certain equity investments for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these equity investments. Equity investments, at fair value, are managed based on overall value and potential returns. These equity investments carried at fair value are presented separately on the condensed consolidated balance sheets with unrealized gains and losses reported in net realized and unrealized gains and losses on investments on the condensed consolidated statements of operations.

Securities Sold, Not Yet Purchased

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased consist of equity and debt securities that the Company has sold short. In order to facilitate a short sale, the Company borrows the securities from another party and delivers the securities to the buyer. The Company will be required to “cover” its short sale in the future through the purchase of the security in the market at the prevailing market price and deliver it to the counterparty from which it borrowed. The Company is exposed to a loss to the extent that the security price increases during the time from when the Company borrowed the security to when the Company purchases it in the market to cover the short sale. Securities sold, not yet purchased are presented within accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets with gains and losses reported in net realized and unrealized gains and losses on investments on the condensed consolidated statement of operations.

Corporate Loans, Net

Corporate Loans, Net

Corporate Loans

Corporate loans are generally held for investment and the Company initially records loans at their purchase prices. The Company subsequently accounts for loans based on their outstanding principal plus or minus unaccreted purchase discounts and unamortized purchase premiums. Corporate loans that the Company transfers to held for sale are transferred at the lower of cost or estimated fair value.

Interest income on loans includes interest at stated coupon rates adjusted for accretion of purchase discounts and the amortization of purchase premiums. Unamortized premiums and unaccreted discounts are recognized in interest income over the contractual life, adjusted for actual prepayments, of the loans using the effective interest method.

A loan is typically placed on non-accrual status at such time as: (i) management believes that scheduled debt service payments may not be paid when contractually due; (ii) the loan becomes 90 days delinquent; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the underlying collateral securing the loan decreases below the Company’s carrying value of such loan. As such, loans placed on non-accrual status may or may not be contractually past due at the time of such determination. While on non-accrual status, previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using the cost-recovery method, cash-basis method or some combination of the two methods. A loan is placed back on accrual status when the ultimate collectability of the principal and interest is not in doubt.

The Company may modify corporate loans in transactions where the borrower is experiencing financial difficulty and a concession is granted to the borrower as part of the modification. These concessions may include a reduction in interest rate, payment extensions, forgiveness of principal, an exchange of assets or a combination thereof. Such modifications typically qualify as troubled debt restructurings. The Company may also identify receivables that are newly considered impaired and discloses the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired.

In addition, the Company may also modify corporate loans which usually involve changes in existing interest rates combined with changes of existing maturities to prevailing market rates/maturities for similar instruments at the time of modification. Such modifications typically do not meet the definition of a troubled debt restructuring since the respective borrowers are neither experiencing financial difficulty nor are seeking a concession as part of the modification.

The corporate loans the Company invests in are generally deemed in default upon the non-payment of a single interest payment or as a result of the violation of a covenant in the respective loan agreement. The Company charges-off a portion or all of its amortized cost basis in a corporate loan when it determines that it is uncollectible due to either: i) the estimation based on a recovery value analysis of a defaulted loan that less than the amortized cost amount will be recovered through the agreed upon restructuring of the loan or as a result of a bankruptcy process of the issuer of the loan; or ii) the determination by the Company to transfer a loan to held for sale with the loan having an estimated market value below the amortized cost basis of the loan.

Loans acquired with deteriorated credit quality are recorded at initial cost and interest income is recognized as the difference between the Company’s estimate of all cash flows that it will receive from the loan in excess of its initial investment on a level-yield basis over the life of the loan (accretable yield) using the effective interest method.

Allowance for Loan Losses

Allowance for Loan Losses

The Company’s corporate loan portfolio is comprised of a single portfolio segment which includes one class of financing receivables, that is, high yield loans that are purchased via assignment or participation in either the primary or secondary market and are held primarily for investment. High yield loans are generally characterized as having below investment grade ratings or being unrated.

The Company’s allowance for loan losses represents its estimate of probable credit losses inherent in its corporate loan portfolio held for investment as of the balance sheet date. Estimating the Company’s allowance for loan losses involves a high degree of management judgment and is based upon a comprehensive review of the Company’s loan portfolio that is performed on a quarterly basis. The Company’s allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses pertains to specific loans that the Company has determined are impaired. The Company determines a loan is impaired when management estimates that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. On a quarterly basis the Company performs a comprehensive review of its entire loan portfolio and identifies certain loans that it has determined are impaired. Once a loan is identified as being impaired, the Company places the loan on non-accrual status, unless the loan is already on non-accrual status, and records a reserve that reflects management’s best estimate of the loss that the Company expects to recognize from the loan. The expected loss is estimated as being the difference between the Company’s current cost basis of the loan, including accrued interest receivable, and the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the loan’s observable estimated fair value may be used.

The unallocated component of the Company’s allowance for loan losses represents its estimate of probable losses inherent in the loan portfolio as of the balance sheet date where the specific loan that the loan loss relates to is indeterminable. The Company estimates the unallocated component of the allowance for loan losses through a comprehensive review of its loan portfolio and identifies certain loans that demonstrate possible indicators of impairment, including internally assigned credit quality indicators. This assessment excludes all loans that are determined to be impaired and as a result, an allocated reserve has been recorded as described in the preceding paragraph. Such indicators include, but are not limited to, the current and/or forecasted financial performance and liquidity profile of the issuer, specific industry or economic conditions that may impact the issuer, and the observable trading price of the loan if available. All loans are first categorized based on their assigned risk grade and further stratified based on the seniority of the loan in the issuer’s capital structure. The seniority classifications assigned to loans are senior secured, second lien and subordinate. Senior secured consists of loans that are the most senior debt in an issuer’s capital structure and therefore have a lower estimated loss severity than other debt that is subordinate to the senior secured loan. Senior secured loans often have a first lien on some or all of the issuer’s assets. Second lien consists of loans that are secured by a second lien interest on some or all of the issuer’s assets; however, the loan is subordinate to the first lien debt in the issuer’s capital structure. Subordinate consists of loans that are generally unsecured and subordinate to other debt in the issuer’s capital structure.

There are three internally assigned risk grades that are applied to loans that have not been identified as being impaired: high, moderate and low. High risk means that there is evidence of possible loss due to the financial or operating performance and liquidity of the issuer, industry or economic concerns specific to the issuer, or other factors that indicate that the breach of a covenant contained in the related loan agreement is possible. Moderate risk means that while there is not observable evidence of loss, there are issuer and/or industry specific trends that indicate a loss may have occurred. Low risk means that while there is no identified evidence of loss, there is the risk of loss inherent in the loan that has not been identified. All loans held for investment, with the exception of loans that have been identified as impaired, are assigned a risk grade of high, moderate or low.

The Company applies a range of default and loss severity estimates in order to estimate a range of loss outcomes upon which to base its estimate of probable losses that results in the determination of the unallocated component of the Company’s allowance for loan losses.

Corporate Loans Held for Sale

Corporate Loans Held for Sale

From time to time the Company makes the determination to transfer certain of its corporate loans from held for investment to held for sale. The decision to transfer a loan to held for sale is generally as a result of the Company determining that the respective loan’s credit quality in relation to the loan’s expected risk-adjusted return no longer meets the Company’s investment objective and/or the Company deciding to reduce or eliminate its exposure to a particular loan for risk management purposes. Corporate loans held for sale are stated at lower of cost or estimated fair value and are assessed on an individual basis. Prior to transferring a loan to held for sale, any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to the yield by the interest method. The loan is transferred from held for investment to held for sale at the lower of its cost or estimated fair value and is carried at the lower of its cost or estimated fair value thereafter. Subsequent to transfer and while the loan is held for sale, recognition as an adjustment to yield by the interest method is discontinued for any difference between the carrying amount of the loan and its outstanding principal balance.

From time to time the Company also makes the determination to transfer certain of its corporate loans from held for sale back to held for investment. The decision to transfer a loan back to held for investment is generally as a result of the circumstances that led to the initial transfer to held for sale no longer being present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy. The loan is transferred from held for sale back to held for investment at the lower of its cost or estimated fair value, whereby a new cost basis is established based on this amount.

Interest income on corporate loans classified as held for sale is recognized through accrual of the stated coupon rate for the loans, unless the loans are placed on non-accrual status, at which point previously recognized accrued interest is reversed if it is determined that such amounts are not collectible and interest income is recognized using either the cost-recovery method or on a cash-basis.

Corporate Loans, at Estimated Fair Value

Corporate Loans, at Estimated Fair Value

The Company has elected the fair value option of accounting for certain corporate loans for the purpose of enhancing the transparency of its financial condition as fair value is consistent with how the Company manages the risks of these corporate loans. Corporate loans carried at estimated fair value are included within corporate loans, net on the condensed consolidated balance sheets with unrealized gains and losses reported in income.

Long-Lived Assets

Long-Lived Assets

The Company evaluates its proved oil and natural gas properties and related equipment and facilities for impairment whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. For the three months ended March 31, 2012 and 2011, the Company recorded an immaterial amount and zero, respectively, of impairments related to its oil and natural gas assets, which are included in other assets on the condensed consolidated balance sheets.

Borrowings

Borrowings

The Company finances the majority of its investments through the use of secured borrowings in the form of securitization transactions structured as non-recourse secured financings and other secured and unsecured borrowings. In addition, the Company finances certain of its oil and gas asset acquisitions through borrowings. The Company recognizes interest expense on all borrowings on an accrual basis.

Trust Preferred Securities

Trust Preferred Securities

Trusts formed by the Company for the sole purpose of issuing trust preferred securities are not consolidated by the Company as the Company has determined that it is not the primary beneficiary of such trusts. The Company’s investment in the common securities of such trusts is included in other assets on the condensed consolidated balance sheets.

Derivative Financial Instruments

Derivative Financial Instruments

The Company recognizes all derivatives on the condensed consolidated balance sheet at estimated fair value. On the date the Company enters into a derivative contract, the Company designates and documents each derivative contract as one of the following at the time the contract is executed: (i) a hedge of a recognized asset or liability (“fair value” hedge); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (iii) a hedge of a net investment in a foreign operation; or (iv) a derivative instrument not designated as a hedging instrument (“free-standing derivative”). For a fair value hedge, the Company records changes in the estimated fair value of the derivative instrument and, to the extent that it is effective, changes in the fair value of the hedged asset or liability in the current period earnings in the same financial statement category as the hedged item. For a cash flow hedge, the Company records changes in the estimated fair value of the derivative to the extent that it is effective in other comprehensive (loss) income and subsequently reclassifies these changes in estimated fair value to net income in the same period(s) that the hedged transaction affects earnings. The effective portion of the cash flow hedges is recorded in the same financial statement category as the hedged item. For free-standing derivatives, the Company reports changes in the fair values in other income (loss).

The Company formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Company’s evaluation of effectiveness of its hedged transactions. Periodically, the Company also formally assesses whether the derivative it designated in each hedging relationship is expected to be and has been highly effective in offsetting changes in estimated fair values or cash flows of the hedged item using either the dollar offset or the regression analysis method. If the Company determines that a derivative is not highly effective as a hedge, it discontinues hedge accounting.

Foreign Currency

Foreign Currency

The Company makes investments in non-United States dollar denominated securities and loans. As a result, the Company is subject to the risk of fluctuation in the exchange rate between the United States dollar and the foreign currency in which it makes an investment. In order to reduce the currency risk, the Company may hedge the applicable foreign currency. All investments denominated in a foreign currency are converted to the United States dollar using prevailing exchange rates on the balance sheet date. Income, expenses, gains and losses on investments denominated in a foreign currency are converted to the United States dollar using the prevailing exchange rates on the dates when they are recorded. Foreign exchange gains and losses are recorded in the condensed consolidated statements of operations.

Manager Compensation

Manager Compensation

The Management Agreement provides for the payment of a base management fee to the Manager, as well as an incentive fee if the Company’s financial performance exceeds certain benchmarks. Additionally, the Management Agreement provides for the Manager to be reimbursed for certain expenses incurred on the Company’s behalf. See Note 11 to these condensed consolidated financial statements for additional discussion on the payment of the base management fee and incentive fee. The base management fee and the incentive fee are accrued and expensed during the period for which they are earned by the Manager.

Share-Based Compensation

Share-Based Compensation

The Company accounts for share-based compensation issued to its directors and to its Manager using the fair value based methodology in accordance with relevant accounting guidance. Compensation cost related to restricted common shares issued to the Company’s directors is measured at its estimated fair value at the grant date, and is amortized and expensed over the vesting period on a straight-line basis. Compensation cost related to restricted common shares and common share options issued to the Manager is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards are unvested. The Company has elected to use the graded vesting attribution method to amortize compensation expense for the restricted common shares and common share options granted to the Manager.

Income Taxes

Income Taxes

The Company intends to continue to operate so as to qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation. Therefore, the Company generally is not subject to United States federal income tax at the entity level, but is subject to limited state and foreign taxes. Holders of the Company’s shares will be required to take into account their allocable share of each item of the Company’s income, gain, loss, deduction, and credit for the taxable year of the Company ending within or with their taxable year.

During 2012, the Company owned an equity interest in KKR Financial Holdings II, LLC (“KFH II”), which elected to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). KFH II holds certain real estate mortgage-backed securities. A REIT generally is not subject to United States federal income tax to the extent that it currently distributes its income and satisfies certain asset, income and ownership tests, and recordkeeping requirements, but it may be subject to some amount of federal, state, local and foreign taxes based on its taxable income.

The Company has wholly-owned domestic and foreign subsidiaries that are taxable as corporations for United States federal income tax purposes and thus are not consolidated with the Company for United States federal income tax purposes. For financial reporting purposes, current and deferred taxes are provided for on the portion of earnings recognized by the Company with respect to its interest in the domestic taxable corporate subsidiaries, because each is taxed as a regular corporation under the Code. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP condensed consolidated financial statements and the United States federal income tax basis of assets and liabilities as of each condensed consolidated balance sheet date. The foreign corporate subsidiaries were formed to make certain foreign and domestic investments from time to time. The foreign corporate subsidiaries are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands, and are anticipated to be exempt from United States federal and state income tax at the corporate entity level because they restrict their activities in the United States to trading in stock and securities for their own account. However, the Company will be required to include their current taxable income in the Company’s calculation of its taxable income allocable to shareholders.

The Company must recognize the tax impact from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax impact recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain tax positions are recorded as tax expense. Significant judgment is required in the identification of uncertain tax positions and in the estimation of penalties and interest on uncertain tax positions. If it is determined that recognition for an uncertain tax provision is necessary, the Company would record a liability for an unrecognized tax expense from an uncertain tax position taken or expected to be taken.

Earnings Per Share

Earnings Per Share

The Company presents both basic and diluted earnings per common share (“EPS”) in its condensed consolidated financial statements and footnotes thereto. Basic earnings per common share (“Basic EPS”) excludes dilution and is computed by dividing net income or loss by the weighted average number of common shares, including vested restricted common shares, outstanding for the period. The Company calculates EPS using the more dilutive of the two-class method or the if-converted method. The two-class method is an earnings allocation formula that determines EPS for common shares and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS using the two-class method. Accordingly, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Diluted earnings (loss) per share (“Diluted EPS”) reflects the potential dilution of common share options and unvested restricted common shares using the treasury method, as well as the potential dilution of convertible senior notes using the number of shares it would take to satisfy the excess conversion obligation (average Company share price for the period in excess of the conversion price related to the Company’s convertible senior notes), if they are not anti-dilutive.

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Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012 Issuer	Dec. 31, 2011 Issuer
Concentrated risks
Number of issuers with whom a specified percentage of estimated fair value of available-for-sale securities is concentrated	10	10
Number of largest issuers out of ten issuers with whom a specified percentage of estimated fair value of available-for-sale securities is concentrated	2	2
Securities	$ 865,759	$ 922,603
Securities available-for-sale | Credit concentration | First Data Corporation and SandRidge Energy,Inc.
Concentrated risks
Concentration risk (as a percent)	19.00%	17.00%
Securities	$ 140,500	$ 138,300
Securities available-for-sale | Credit concentration | Ten issuers
Concentrated risks
Concentration risk (as a percent)	49.00%	46.00%

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Securities (Tables)

3 Months Ended

Mar. 31, 2012

Securities

Summary of the company's securities which are carried at estimated fair value

	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale:
Corporate debt securities	$	667,095	$	86,379	$	(7,637	)	$	745,837
Common and preferred stock	5,330		1,153		—			6,483
Total securities available-for-sale	672,425		87,532		(7,637		)	752,320
Other securities, at estimated fair value(1)	21,889		4,641		(454		)	26,076
Residential mortgage-backed securities, at estimated fair value(1)	202,588		4,221		(119,446		)	87,363
Total securities	$	896,902	$	96,394	$	(127,537	)	$	865,759

(1)Unrealized gains and losses are recorded in earnings.

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale:
Corporate debt securities	$	741,438	$	75,442	$	(13,637	)	$	803,243
Common and preferred stock	12,766		444		—			13,210
Total securities available-for-sale	754,204		75,886		(13,637		)	816,453
Other securities, at estimated fair value(1)	16,467		3,225		(21		)	19,671
Residential mortgage-backed securities, at estimated fair value(1)	209,502		4,132		(127,155		)	86,479
Total securities	$	980,173	$	83,243	$	(140,813	)	$	922,603

(1)Unrealized gains and losses are recorded in earnings.

Schedule of gross continuous unrealized loss positions of securities classified as available-for-sale

	Less Than 12 months					12 Months or More					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
March 31, 2012
Corporate debt securities	$	102,509	$	(5,403	)	$	11,402	$	(2,234	)	$	113,911	$	(7,637	)
December 31, 2011
Corporate debt securities	$	252,467	$	(10,562	)	$	32,876	$	(3,075	)	$	285,343	$	(13,637	)

Schedule of realized gains and losses on available-for-sale securities

	For the three months ended March 31, 2012		For the three months ended March 31, 2011
Gross realized gains	$	7,581	$	7,408
Gross realized losses	—		(72		)
Net realized gains (1)	$	7,581	$	7,336

(1)Excludes net realized gains from paydowns and restructurings totaling $16.2 million, including a $0.8 million premium on bond redemption, and zero for the three months ended March 31, 2012 and 2011, respectively. Also, excludes an impairment charge of $0.7 million and zero for investments which were determined to be other-than-temporary for the three months ended March 31, 2012 and 2011.

Schedule of estimated fair value of securities pledged as collateral

	As of March 31, 2012		As of December 31, 2011
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	663,534	$	710,734
Total	$	663,534	$	710,734

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Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash flows from operating activities:
Net income	$ 88,048	$ 93,767
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized and unrealized gain on derivatives and foreign exchange	(9,149)	(6,067)
Net loss on restructuring and extinguishment of debt	445
Write-off of debt issuance costs	386	450
Lower of cost or estimated fair value adjustment on corporate loans held for sale	(10,401)	(1,567)
Provision for loan losses	46,498	11,661
Impairment on securities available-for-sale and private equity investments at cost	733	975
Share-based compensation	614	1,833
Net realized and unrealized loss on residential mortgage-backed securities, at estimated fair value	(3,047)	738
Net realized and unrealized gain on investments	(53,920)	(38,592)
Depreciation and net amortization	(16,146)	(25,576)
Changes in assets and liabilities:
Interest receivable	6,583	2,394
Other assets	(8,444)	(2,800)
Related party payable	5,749	2,778
Accounts payable, accrued expenses and other liabilities	1,103	(47)
Net cash provided by operating activities	44,716	34,082
Cash flows from investing activities:
Principal payments from corporate loans	621,928	551,504
Principal payments from securities available-for-sale and other securities, at estimated fair value	18,791	39,145
Principal payments from residential mortgage-backed securities, at estimated fair value	1,552	1,901
Proceeds from sale of corporate loans	167,981	62,750
Proceeds from sale of securities available-for-sale and other securities, at estimated fair value	93,641	32,992
Proceeds from sale of equity investments	3,216	6,020
Proceeds from securities sold, not yet purchased		20,401
Purchases of corporate loans	(291,143)	(763,390)
Purchases of securities available-for-sale and other securities, at estimated fair value	(13,085)	(48,729)
Purchases of equity and other investments	(89,946)	(69,722)
Cover securities sold, not yet purchased		(19,180)
Net proceeds, purchases, and settlements of derivatives	(6,243)	249
Net change in restricted cash and cash equivalents	(424,330)	(19,811)
Net cash provided by (used in) investing activities	82,362	(205,870)
Cash flows from financing activities:
Issuance of collateralized loan obligation secured debt	31,876	125,837
Retirement of collateralized loan obligation secured debt	(93,888)	(110,426)
Retirement of collateralized loan obligation junior secured notes to affiliates		(276)
Proceeds from credit facilities	28,500
Repayment of convertible senior notes	(23,495)
Proceeds from senior notes	111,418
Distributions on common shares	(46,384)	(26,719)
Issuance of common shares		1,297
Repurchase and cancellation of common shares	(96)	(1,297)
Other capitalized costs	(317)	(1,125)
Net cash provided by (used in) financing activities	7,614	(12,709)
Net increase (decrease) in cash and cash equivalents	134,692	(184,497)
Cash and cash equivalents at beginning of period	392,154	313,829
Cash and cash equivalents at end of period	526,846	129,332
Supplemental cash flow information:
Cash paid for interest	49,640	41,879
Net cash paid for income taxes	45	31
Non-cash investing and financing activities:
Issuance of restricted common shares	2,446	2,355
Loans transferred from held for investment to held for sale	46,077	582,878
Loans transferred from held for sale to held for investment	7,504	97,857
Affiliates
Changes in assets and liabilities:
Accrued interest payable	541	748
Nonaffiliates
Changes in assets and liabilities:
Accrued interest payable	$ (4,877)	$ (6,613)

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Condensed Consolidated Balance Sheets
Corporate loans held for sale (in dollars)	$ 297,708	$ 317,332
Equity investments, at estimated fair value, pledged as collateral (in dollars)	$ 15,528	$ 12,222
Preferred shares, no par value
Preferred shares, shares authorized	50,000,000	50,000,000
Preferred shares, shares issued	0	0
Preferred shares, shares outstanding	0	0
Common shares, no par value
Common shares, shares authorized	500,000,000	500,000,000
Common shares, shares issued	178,393,521	178,145,482
Common shares, shares outstanding	178,393,521	178,145,482

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Common Shares, Restricted Shares and Share Options

3 Months Ended

Mar. 31, 2012

Common Shares, Restricted Shares and Share Options

Common Shares, Restricted Shares and Share Options

Note 10. Common Shares, Restricted Shares and Share Options

On May 4, 2007, the Company adopted an amended and restated share incentive plan (the “2007 Share Incentive Plan”) that provides for the grant of qualified incentive common share options that meet the requirements of Section 422 of the Code, non-qualified common share options, share appreciation rights, restricted common shares and other share-based awards. The Compensation Committee of the board of directors administers the plan. Share options and other share-based awards may be granted to the Manager, directors, officers and any key employees of the Manager and to any other individual or entity performing services for the Company.

The exercise price for any share option granted under the 2007 Share Incentive Plan may not be less than 100% of the fair market value of the common shares at the time the common share option is granted. Each option to acquire a common share must terminate no more than ten years from the date it is granted. As of March 31, 2012, the 2007 Share Incentive Plan authorizes a total of 8,714,625 shares that may be used to satisfy awards under the 2007 Share Incentive Plan. On January 17, 2012, the Compensation Committee of the board of directors granted the Manager 258,303 restricted common shares subject to graded vesting over three years with the final vesting date of March 1, 2015.

The following table summarizes restricted common share transactions:

	Manager		Directors	Total
Unvested shares as of January 1, 2012	240,845		145,676	386,521
Issued	258,303		—	258,303
Vested	(60,211	)	—	(60,211	)
Forfeited	—		—	—
Unvested shares as of March 31, 2012	438,937		145,676	584,613

The Company is required to value any unvested restricted common shares granted to the Manager at the current market price. The Company valued the unvested restricted common shares granted to the Manager at $9.21 and $9.79 per share at March 31, 2012 and 2011, respectively. There were $3.9 million and $2.9 million of total unrecognized compensation costs related to unvested restricted common shares granted as of March 31, 2012 and 2011, respectively. These costs are expected to be recognized through 2015. The following table summarizes common share option transactions:

	Number of Options	Weighted Average Exercise Price
Outstanding as of January 1, 2012	1,932,279	$	20.00
Granted	—	—
Exercised	—	—
Forfeited	—	—
Outstanding as of March 31, 2012	1,932,279	$	20.00

As of March 31, 2012 and 2011, 1,932,279 common share options were exercisable. As of March 31, 2012, the common share options were fully vested and expire in August 2014.

For the three months ended March 31, 2012 and 2011, the components of share-based compensation expense are as follows (amounts in thousands):

	For the three months ended March 31, 2012		For the three months ended March 31, 2011
Restricted shares granted to Manager	$	383	$	1,634
Restricted shares granted to certain directors	231		199
Total share-based compensation expense	$	614	$	1,833

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Document and Entity Information	3 Months Ended
	Mar. 31, 2012	May 02, 2012
Document and Entity Information
Entity Registrant Name	KKR Financial Holdings LLC
Entity Central Index Key	0001386926
Document Type	10-Q
Document Period End Date	Mar. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		178,393,521
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1

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Management Agreement and Related Party Transactions

3 Months Ended

Mar. 31, 2012

Management Agreement and Related Party Transactions

Management Agreement and Related Party Transactions

Note 11. Management Agreement and Related Party Transactions

The Manager manages the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors. The Management Agreement expires on December 31 of each year, but is automatically renewed for a one-year term each December 31 unless terminated upon the affirmative vote of at least two-thirds of the Company’s independent directors, or by a vote of the holders of a majority of the Company’s outstanding common shares, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable by the Manager is not fair, subject to the Manager’s right to prevent such a termination under this clause (2) by accepting a mutually acceptable reduction of management fees. The Manager must be provided 180 days prior notice of any such termination and will be paid a termination fee equal to four times the sum of the average annual base management fee and the average annual incentive fee for the two 12-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

The Management Agreement contains certain provisions requiring the Company to indemnify the Manager with respect to all losses or damages arising from acts not constituting bad faith, willful misconduct, or gross negligence. The Company has evaluated the impact of these guarantees on its condensed consolidated financial statements and determined that they are not material.

Base Management Fees and Manager Share-Based Compensation

For the three months ended March 31, 2012, the Company incurred $7.0 million in base management fees. As of March 31, 2012, the Company had $2.4 million base management fee payable to the Manager. In addition, the Company recognized share-based compensation expense related to restricted common shares granted to the Manager of $0.4 million for the three months ended March 31, 2012 (see Note 10). For the three months ended March 31, 2011, the Company incurred $6.2 million in base management fees. In addition, the Company recognized share-based compensation expense related to restricted common shares granted to the Manager of $1.6 million for the three months ended March 31, 2011 (see Note 10).

Base management fees incurred and share-based compensation expense relating to common share options and restricted common shares granted to the Manager are included in related party management compensation on the condensed consolidated statements of  operations. Expenses incurred by the Manager and reimbursed by the Company are reflected in the respective condensed consolidated statements of operations, non-investment expense category based on the nature of the expense.

The Manager is waiving base management fees related to the $230.4 million common share offering and $270.0 million common share rights offering that occurred during the third quarter of 2007 until such time as the Company’s common share closing price on the New York Stock Exchange (“NYSE”) is $20.00 or more for five consecutive trading days. Accordingly, the Manager permanently waived approximately $2.2 million of base management fees during each of the three months ended March 31, 2012 and 2011.

Incentive Fees

During the three months ended March 31, 2012, the Manager earned $9.7 million of incentive fees. As of March 31, 2012, the Company had $9.7 million incentive fee payable to the Manager. During the three months ended March 31, 2011, the Manager earned $12.0 million of incentive fees. Incentive fees are included in related party management compensation on the Company’s condensed consolidated statement of operations.

CLO Management Fees

An affiliate of the Manager entered into separate management agreements with the respective investment vehicles for CLO 2005-1, CLO 2005-2, CLO 2006-1, CLO 2007-1, CLO 2007-A and CLO 2011-1 and is entitled to receive fees for the services performed as collateral manager for all of these CLOs, except for CLO 2011-1. The collateral manager has the option to waive the fees it earns for providing management services for the CLO.

During the three months ended March 31, 2012 and 2011, the collateral manager waived all management fees for all CLOs, except for CLO 2005-1, and waived aggregate CLO management fees of $8.3 million and $8.8 million, respectively. For the three months ended March 31, 2012 and 2011, the Company recorded an expense for CLO management fees totaling $1.1 million and $1.3 million, respectively.

Reimbursable General and Administrative Expenses

Certain general and administrative expenses are incurred by the Company’s Manager on its behalf that are reimbursable to the Manager pursuant to the Management Agreement. During the three months ended March 31 2012 and 2011, the Company incurred reimbursable general and administrative expenses to its Manager of $2.0 million and $1.7 million, respectively.

Affiliated Investments

The Company has invested in corporate loans, debt securities, and other investments of entities that are affiliates of KKR. As of March 31, 2012, the aggregate par amount of these affiliated investments totaled $2.3 billion, or approximately 30% of the total investment portfolio, and consisted of 30 issuers. The total $2.3 billion in affiliated investments was comprised of $2.1 billion of corporate loans, $146.6 million of corporate debt securities and $68.9 million of equity investments, at estimated fair value. As of December 31, 2011, the aggregate par amount of these affiliated investments totaled $2.4 billion, or approximately 29% of the total investment portfolio, and consisted of 28 issuers. The total $2.4 billion in affiliated investments was comprised of $2.2 billion of corporate loans, $168.1 million of corporate debt securities and $62.0 million of equity investments, at estimated fair value.

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Condensed Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Net investment income:
Loan interest income	$ 104,094	$ 109,645
Securities interest income	22,576	22,556
Other investment income	11,264	3,129
Total investment income	137,934	135,330
Provision for loan losses	46,498	11,661
Net investment income	37,862	79,452
Other income:
Net realized and unrealized gain on investments	63,588	39,184
Net realized and unrealized gain on derivatives and foreign exchange	9,149	6,067
Net realized and unrealized gain (loss) on residential mortgage-backed securities, at estimated fair value	3,047	(738)
Net loss on restructuring and extinguishment of debt	(445)
Other income	3,592	1,923
Total other income	78,931	46,436
Non-investment expenses:
Related party management compensation	18,113	21,201
General, administrative and directors expenses	12,804	8,171
Professional services	1,896	1,432
Total non-investment expenses	32,813	30,804
Income before income tax (benefit) expense	83,980	95,084
Income tax (benefit) expense	(4,068)	1,317
Net income	88,048	93,767
Net income per common share:
Basic (in dollars per share)	$ 0.49	$ 0.53
Diluted (in dollars per share)	$ 0.48	$ 0.51
Weighted-average number of common shares outstanding:
Basic (in shares)	177,775	177,075
Diluted (in shares)	182,247	181,292
Affiliates
Net investment income:
Interest expense	12,859	12,096
Nonaffiliates
Net investment income:
Interest expense	$ 40,715	$ 32,121

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Corporate Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2012

Corporate Loans and Allowance for Loan Losses

Corporate Loans and Allowance for Loan Losses

Note 5. Corporate Loans and Allowance for Loan Losses

The Company accounts for loans based on the following categories (i) corporate loans held for investment, which are measured based on their outstanding principal plus or minus unaccreted purchase discounts and unamortized purchase premiums, net of an allowance for loan losses; (ii) corporate loans held for sale, which are measured at lower of cost or estimated fair value; and (iii) corporate loans, at estimated fair value, which are measured at fair value.

The following table summarizes the Company’s corporate loans as of March 31, 2012 (amounts in thousands):

	March 31, 2012
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,056,204		$	434,336		$	12,411		$	6,502,951
Net unamortized discount	(155,091		)	(97,031		)	(3,634		)	(255,756		)
Total amortized cost	5,901,113			337,305			8,777			6,247,195
Lower of cost or fair value adjustment	—			(39,597		)	—			(39,597		)
Allowance for loan losses	(235,807		)	—			—			(235,807		)
Unrealized gains	—			—			1,152			1,152
Net carrying value	$	5,665,306		$	297,708		$	9,929		$	5,972,943

(1)Principal amount is net of cumulative charge-offs and other adjustments totaling $83.8 million as of March 31, 2012.

The following table summarizes the Company’s corporate loans as of December 31, 2011 (amounts in thousands):

	December 31, 2011
	Corporate Loans			Corporate Loans Held for Sale			Corporate Loans, at Estimated Fair Value			Total Corporate Loans
Principal(1)	$	6,501,679		$	470,562		$	3,655		$	6,975,896
Net unamortized discount	(187,381		)	(102,324		)	(562		)	(290,267		)
Total amortized cost	6,314,298			368,238			3,093			6,685,629
Lower of cost or fair value adjustment	—			(50,906		)	—			(50,906		)
Allowance for loan losses	(191,407		)	—			—			(191,407		)
Unrealized gains	—			—			83			83
Net carrying value	$	6,122,891		$	317,332		$	3,176		$	6,443,399

(1)Principal amount is net of cumulative charge-offs and other adjustments totaling $79.8 million as of December 31, 2011.

Allowance For Loan Losses

As of March 31, 2012 and December 31, 2011, the Company had an allowance for loan losses of $235.8 million and $191.4 million, respectively. As described in Note 2 to these condensed consolidated financial statements, the allowance for loan losses represents the Company’s estimate of probable credit losses inherent in its loan portfolio as of the balance sheet date. The Company’s allowance for loan losses consists of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses consists of individual loans that are impaired. The unallocated component of the allowance for loan losses represents the Company’s estimate of losses inherent, but not identified, in its portfolio as of the balance sheet date.

The following table summarizes the changes in the allowance for loan losses for the Company’s corporate loan portfolio during the three months ended March 31, 2012 and 2011 (amounts in thousands):

	For the three months ended March 31, 2012			For the three months ended March 31, 2011
Allowance for loan losses:
Beginning balance	$	191,407		$	209,030
Provision for loan losses	46,498			11,661
Charge-offs	(2,098		)	(22,109		)
Ending balance	$	235,807		$	198,582

The following table summarizes the ending balances of the allowance and corporate loans portfolio by basis of impairment method as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	March 31, 2012		December 31, 2011
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	235,807	$	191,407
Ending balance: collectively evaluated for impairment	—		—
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	235,807	$	191,407
Corporate loans (recorded investment)(1):
Ending balance: individually evaluated for impairment	$	5,917,667	$	6,334,232
Ending balance: collectively evaluated for impairment	—		—
Ending balance: loans acquired with deteriorated credit quality	—		—
	$	5,917,667	$	6,334,232

(1)           Recorded investment is defined as amortized cost plus accrued interest.

As of March 31, 2012, the allocated component of the allowance for loan losses totaled $34.5 million and relates to investments in certain loans issued by five issuers with an aggregate par amount of $84.0 million and an aggregate recorded investment of $69.0 million. As of December 31, 2011, the allocated component of the allowance for loan losses totaled $33.8 million and relates to investments in certain loans issued by five issuers with an aggregate par amount of $83.5 million and an aggregate recorded investment of $68.7 million.

The following table summarizes the Company’s recorded investment in impaired loans and the related allowance for credit losses for the three months ended March 31, 2012 and year ended December 31, 2011 (amounts in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2012
With no related allowance recorded	$	—	$	—	$	—	$	—	$	—
With an allowance recorded	69,028		84,005		34,456		68,860		803
Total	$	69,028	$	84,005	$	34,456	$	68,860	$	803

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2011
With no related allowance recorded	$	—	$	—	$	—	$	3,244	$	—
With an allowance recorded	68,692		83,452		33,836		76,933		2,645
Total	$	68,692	$	83,452	$	33,836	$	80,177	$	2,645

As of March 31, 2012 and December 31, 2011, the allocated component of the allowance for loan losses included all impaired loans. While all of the Company’s impaired loans are on non-accrual status, the Company’s non-accrual loans also include those held for sale that are measured at the lower of cost or fair value and are not reflected in the table above.

The following table summarizes the Company’s recorded investment in non-accrual loans as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	March 31, 2012		December 31, 2011
Impaired loans held for investment	$	69,028	$	68,692
Loans held for sale	100,291		99,999
Total non-accrual loans	$	169,319	$	168,691

The amount of interest income recognized using the cash-basis method during the time within the period that the loans were impaired was $4.4 million, which included $0.8 million for impaired loans that were held for investment and $3.6 million for non-accrual loans held for sale for the three months ended March 31, 2012. The amount of interest income recognized using the cash-basis method during the time within the period that the loans were impaired was $4.0 million, which included $0.4 million for impaired loans that were held for investment and $3.6 million for non-accrual loans held for sale for the three months ended March 31, 2011.

The Company did not have any corporate loans past due at March 31, 2012 and 2011.

The unallocated component of the allowance for loan losses totaled $201.3 million and $157.6 million as of March 31, 2012 and December 31, 2011, respectively. As described in Note 2 to these condensed consolidated financial statements, the Company estimates the unallocated components of the allowance for loan losses through a comprehensive review of its loan portfolio and identifies certain loans that demonstrate possible indicators of impairments, including credit quality indicators. The following table summarizes how the Company determines internally assigned grades related to credit quality based on a combination of concern as to probability of default and the seniority of the loan in the issuer’s capital structure as of March 31, 2012 and December 31, 2011 (amounts in thousands):

Internally Assigned Grade	Capital Hierarchy	Recorded Investment March 31, 2012 (1)		Recorded Investment December 31, 2011 (1)
High	Senior Secured Loan	$	777,054	$	926,258
	Second Lien Loan	295,239		310,971
	Subordinated	10,349		14,392
		$	1,082,642	$	1,251,621
Moderate	Senior Secured Loan	$	585,694	$	645,939
	Second Lien Loan	—		—
	Subordinated	—		6,951
		$	585,694	$	652,890
Low	Senior Secured Loan	$	4,011,616	$	4,184,094
	Second Lien Loan	126,238		65,695
	Subordinated	42,449		111,240
		$	4,180,303	$	4,361,029
	Total Unallocated	$	5,848,639	$	6,265,540
	Total Allocated	69,028		68,692
	Total Loans Held for Investment	$	5,917,667	$	6,334,232

(1)Recorded investment is defined as amortized cost plus accrued interest.

During the three months ended March 31, 2012 and 2011, the Company recorded charge-offs totaling $2.1 million and $22.1 million, respectively, comprised primarily of loans transferred to loans held for sale.

Loans Held For Sale and the Lower of Cost or Fair Value Adjustment

As of March 31, 2012 and December 31, 2011, the Company had $297.7 million and $317.3 million of loans held for sale, respectively. During the three months ended March 31, 2012 and 2011, the Company transferred $46.1 million and $582.8 million amortized cost amount, respectively, of loans from held for investment to held for sale. The transfers of certain loans to held for sale were due to the Company’s determination that credit quality of a loan in relation to its expected risk-adjusted return no longer met the Company’s investment objective and the determination by the Company to reduce or eliminate the exposure for certain loans as part of its portfolio risk management practices. Also, during the three months ended March 31, 2012 and 2011, the Company transferred $7.5 million and $97.9 million amortized cost amount, respectively, from loans held for sale back to loans held for investment as the circumstances that led to the initial transfer to held for sale were no longer present. Such circumstances may include deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy.

The Company reduced the lower of cost or market valuation allowance by $10.4 million for the three months ended March 31, 2012 for certain loans held for sale, which had a carrying value of $297.7 million as of March 31, 2012. The Company reduced the lower of cost or market valuation allowance by $1.6 million for the three months ended March 31, 2011 for certain loans held for sale, which had a carrying value of $869.8 million as of March 31, 2011.

Defaulted Loans

As of March 31, 2012, the Company held corporate loans that were in default with a total amortized cost of $27.6 million from one issuer. These loans in default were included in the loans for which the allocated component of the Company’s allowance for loan losses was related to, or for which the Company determined were loans held for sale as of March 31, 2012. As of December 31, 2011, the Company had no corporate loans in default.

Troubled Debt Restructurings

The Company did not modify any loans that qualified as troubled debt restructurings during the three months ended March 31, 2012 and 2011.

The Company modified $457.1 million and $540.4 million amortized cost of corporate loans during the three months ended March 31, 2012 and 2011, respectively, that did not qualify as troubled debt restructurings. These modifications involved changes in existing rates and maturities to prevailing market rates/maturities for similar instruments and did not qualify as troubled debt restructurings as the respective borrowers were neither experiencing financial difficulty nor were seeking (nor granted) a concession as part of the modification. In addition, these modifications of non-troubled debt holdings were accomplished with modified loans that were not substantially different from the loans prior to modification.

Concentration Risk

The Company’s corporate loan portfolio has certain credit risk concentrated in a limited number of issuers. As of March 31, 2012, approximately 48% of the total amortized cost basis of the Company’s corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foodservice, Texas Competitive Electric Holdings Company LLC and Modular Space Corporation, which combined represented $993.9 million or approximately 16% of the aggregated amortized cost basis of the Company’s corporate loans. As of December 31, 2011, approximately 47% of the total amortized cost basis of the Company’s corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foodservice, Texas Competitive Electric Holdings Company LLC and Modular Space Corporation, which combined represented $992.5 million, or approximately 15% of the aggregated amortized cost basis of the Company’s corporate loans.

Note 6 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged loans for borrowings. The following table summarizes the amortized cost of corporate loans and corporate loans held for sale pledged as collateral as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	As of March 31, 2012		As ofDecember 31, 2011
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	6,017,183	$	6,448,404
Total	$	6,017,183	$	6,448,404

As of March 31, 2012 and December 31, 2011, no corporate loans, at estimated fair value were pledged as collateral for the Company’s borrowings.

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Securities

3 Months Ended

Mar. 31, 2012

Securities

Securities

Note 4. Securities

The Company accounts for securities based on the following categories: (i) securities available-for-sale, which are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive (loss) income; (ii) other securities, at estimated fair value, with unrealized gains and losses recorded in the condensed consolidated statements of operations; and (iii) residential mortgage-backed securities, at estimated fair value, with unrealized gains and losses recorded in the condensed consolidated statements of operations.

The following table summarizes the Company’s securities as of March 31, 2012, which are carried at estimated fair value (amounts in thousands):

	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale:
Corporate debt securities	$	667,095	$	86,379	$	(7,637	)	$	745,837
Common and preferred stock	5,330		1,153		—			6,483
Total securities available-for-sale	672,425		87,532		(7,637		)	752,320
Other securities, at estimated fair value(1)	21,889		4,641		(454		)	26,076
Residential mortgage-backed securities, at estimated fair value(1)	202,588		4,221		(119,446		)	87,363
Total securities	$	896,902	$	96,394	$	(127,537	)	$	865,759

(1)Unrealized gains and losses are recorded in earnings.

The following table summarizes the Company’s securities as of December 31, 2011, which are carried at estimated fair value (amounts in thousands):

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale:
Corporate debt securities	$	741,438	$	75,442	$	(13,637	)	$	803,243
Common and preferred stock	12,766		444		—			13,210
Total securities available-for-sale	754,204		75,886		(13,637		)	816,453
Other securities, at estimated fair value(1)	16,467		3,225		(21		)	19,671
Residential mortgage-backed securities, at estimated fair value(1)	209,502		4,132		(127,155		)	86,479
Total securities	$	980,173	$	83,243	$	(140,813	)	$	922,603

(1)Unrealized gains and losses are recorded in earnings.

The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale securities, aggregated by length of time that the individual securities have been in a continuous unrealized loss position as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	Less Than 12 months					12 Months or More					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
March 31, 2012
Corporate debt securities	$	102,509	$	(5,403	)	$	11,402	$	(2,234	)	$	113,911	$	(7,637	)
December 31, 2011
Corporate debt securities	$	252,467	$	(10,562	)	$	32,876	$	(3,075	)	$	285,343	$	(13,637	)

The unrealized losses in the table above are considered to be temporary impairments due to market factors and are not reflective of credit deterioration. The Company considers many factors when evaluating whether an impairment is other-than-temporary. For corporate debt securities included in the table above, the Company does not intend to sell them and does not believe that it is more likely than not that the Company will be required to sell any of its corporate debt securities prior to recovery. In addition, based on the analyses performed by the Company on each of its corporate debt securities, the Company believes that it is able to recover the entire amortized cost amount of the corporate debt securities included in the table above.

During the three months ended March 31, 2012 and 2011, the Company recognized losses totaling $0.7 million and zero, respectively, for corporate debt securities that it determined to be other-than-temporarily impaired based on the criteria above. The Company intends to sell these securities and as a result, the entire amount is recorded through earnings in net realized and unrealized gain on investments in the condensed consolidated statements of operations.

For common and preferred stock, the Company considers many factors when evaluating whether an impairment is other-than-temporary, including its intent and ability to hold the common and preferred stock for a period of time sufficient for recovery to cost. If the Company believes it will not recover the cost basis based on its intent or ability, an other-than-temporary loss will be recorded through earnings in net realized and unrealized gain on investments in the condensed consolidated statements of operations.

During both the three months ended March 31, 2012 and 2011, the Company recognized no losses for common and preferred stock that it determined to be other-than-temporary impaired.

As of both March 31, 2012 and December 31, 2011, the Company had no corporate debt securities in default.

Corporate debt securities sold at a loss typically include those that the Company determined to be other-than-temporarily impaired or had a deteriorated credit quality. The following table shows the net realized gains on the sales of securities available-for-sale (amounts in thousands):

	For the three months ended March 31, 2012		For the three months ended March 31, 2011
Gross realized gains	$	7,581	$	7,408
Gross realized losses	—		(72		)
Net realized gains (1)	$	7,581	$	7,336

(1)Excludes net realized gains from paydowns and restructurings totaling $16.2 million, including a $0.8 million premium on bond redemption, and zero for the three months ended March 31, 2012 and 2011, respectively. Also, excludes an impairment charge of $0.7 million and zero for investments which were determined to be other-than-temporary for the three months ended March 31, 2012 and 2011.

The Company’s securities available-for-sale portfolio has certain credit risk concentrated in a limited number of issuers. As of March 31, 2012, approximately 49% of the estimated fair value of the Company’s securities available-for-sale portfolio was concentrated in ten issuers, with the two largest concentrations of securities available-for-sale in securities issued by First Data Corporation and SandRidge Energy, Inc., which combined represented $140.5 million, or approximately 19% of the estimated fair value of the Company’s securities available-for-sale. As of December 31, 2011, approximately 46% of the estimated fair value of the Company’s securities available-for-sale portfolio was concentrated in ten issuers, with the two largest concentrations of securities available-for-sale in securities issued by First Data Corporation and SandRidge Energy, Inc., which combined represented $138.3 million, or approximately 17% of the estimated fair value of the Company’s securities available-for-sale.

Note 6 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged securities for borrowings. The following table summarizes the estimated fair value of securities available-for-sale pledged as collateral as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	As of March 31, 2012		As of December 31, 2011
Pledged as collateral for collateralized loan obligation secured debt and junior secured notes to affiliates	$	663,534	$	710,734
Total	$	663,534	$	710,734

As of March 31, 2012 and December 31, 2011, no other securities, at estimated fair value or RMBS were pledged as collateral for the Company’s borrowings.

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Earnings per Share (Tables)

3 Months Ended

Mar. 31, 2012

Earnings per Share

Schedule of reconciliation of basic and diluted net income and distributions declared per common share

	Three months ended March 31, 2012		Three months ended March 31, 2011
Income from continuing operations	$	88,048	$	93,767
Less: Dividends and undistributed earnings allocated to participating securities	297		612
Net income applicable to common shareholders	$	87,751	$	93,155
Basic:
Basic weighted average shares outstanding	177,775		177,075
Net income per share	$	0.49	$	0.53
Diluted:
Basic weighted average shares outstanding	177,775		177,075
Dilutive effect of convertible senior notes	4,472		4,217
Diluted weighted average shares outstanding(1)	182,247		181,292
Net income per share	$	0.48	$	0.51
Distributions declared per common share	$	0.26	$	0.15

(1)Potential anti-dilutive common shares excluded from diluted earnings per share related to common share options were 1,932,279 for the three months ended March 31, 2012 and 2011.

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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2012

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Note 12. Fair Value of Financial Instruments

Fair Value of Financial Instruments

The fair value of certain instruments including securities available-for-sale, corporate loans, derivatives, and loan commitments is based on quoted market prices or estimates provided by independent pricing sources. The fair value of cash and cash equivalents, interest receivable, and interest payable approximates cost due to the short-term nature of these instruments.

The table below discloses the carrying value and the estimated fair value of the Company’s financial instruments, as well as the respective hierarchy classifications, as of March 31, 2012 (amounts in thousands):

	As of March 31, 2012				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash, restricted cash, and cash equivalents	$	1,350,796	$	1,350,796	$	—	$	1,350,796	$	—
Securities available-for-sale	752,320		752,320		6,483		674,331		71,506
Other securities, at estimated fair value	26,076		26,076		—		23,355		2,721
Residential mortgage-backed securities	87,363		87,363		—		—		87,363
Corporate loans, net of allowance for loan losses of $235,807 as of March 31, 2012	5,665,306		5,723,022		—		5,143,183		579,839
Corporate loans held for sale	297,708		361,764		—		323,774		37,990
Corporate loans, at estimated fair value	9,929		9,929		—		—		9,929
Equity investments, at estimated fair value	203,642		203,642		9,806		34,335		159,501
Interest and principal receivable	38,336		38,336		—		38,336		—
Derivative assets	31,109		31,109		1,517		15,332		14,260
Private equity investments, at cost	780		915		—		—		915
Financial Liabilities:
Collateralized loan obligation secured debt	$	5,496,488	$	5,217,556	$	—	$	—	$	5,217,556
Collateralized loan obligation junior secured notes to affiliates	347,855		292,723		—		—		292,723
Credit facilities	66,800		66,800		—		—		66,800
Convertible senior notes	277,091		357,255		—		357,255		—
Senior notes	362,109		389,310		389,310		—		—
Junior subordinated notes	283,517		256,937		—		—		256,937
Accounts payable, accrued expenses and other liabilities	34,080		34,080		—		34,080		—
Accrued interest payable	20,659		20,659		—		20,659		—
Accrued interest payable to affiliates	7,102		7,102		—		7,102		—
Related party payable	16,827		16,827		—		16,827		—
Securities sold, not yet purchased	1,245		1,245		1,245		—		—
Derivative liabilities	108,164		108,164		—		107,902		262

The table below discloses the carrying value and the estimated fair value of the Company’s financial instruments as of December 31, 2011 (amounts in thousands):

	As of December 31, 2011
	Carrying Amount		Estimated Fair Value
Financial Assets:
Cash, restricted cash, and cash equivalents	$	791,774	$	791,774
Securities available-for-sale	816,453		816,453
Other securities, at estimated fair value	19,671		19,671
Residential mortgage-backed securities	86,479		86,479
Corporate loans, net of allowance for loan losses of $191,407 as of December 31, 2011	6,122,891		5,999,771
Corporate loans held for sale	317,332		359,463
Corporate loans, at estimated fair value	3,176		3,176
Equity investments, at estimated fair value	189,845		189,845
Interest and principal receivable	62,124		62,124
Derivative assets	28,463		28,463
Private equity investments, at cost	780		780
Financial Liabilities:
Collateralized loan obligation secured debt	$	5,540,037	$	5,200,534
Collateralized loan obligation junior secured notes to affiliates	365,848		283,914
Credit facilities	38,300		38,300
Convertible senior notes	299,830		368,502
Senior notes	250,676		261,834
Junior subordinated notes	283,517		262,962
Accounts payable, accrued expenses and other liabilities	23,424		23,424
Accrued interest payable	25,536		25,536
Accrued interest payable to affiliates	6,561		6,561
Related party payable	11,078		11,078
Securities sold, not yet purchased	1,256		1,256
Derivative liabilities	125,333		125,333

Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Balance as of March 31,2012
Assets:
Securities available-for-sale:
Corporate debt securities	$	—		$	674,331		$	71,506		$	745,837
Common and preferred stock	6,483			—			—			6,483
Total securities available-for-sale	6,483			674,331			71,506			752,320
Other securities, at estimated fair value	—			23,355			2,721			26,076
Residential mortgage-backed securities	—			—			87,363			87,363
Total securities	6,483			697,686			161,590			865,759
Corporate loans, at estimated fair value	—			—			9,929			9,929
Equity investments, at estimated fair value	9,806			34,335			159,501			203,642
Total rate of return swaps	—			—			293			293
Foreign exchange options	—			—			12,416			12,416
Commodity swaps	—			11,804			—			11,804
Common stock warrants	1,517			—			1,551			3,068
Foreign exchange forward contracts	—			1,731			—			1,731
Credit default swaps—protection purchased	—			1,681			—			1,681
Credit default swaps—protection sold	—			116			—			116
Other assets	—			—			676			676
Total	$	17,806		$	747,353		$	345,956		$	1,111,115
Liabilities:
Securities sold, not yet purchased	$	(1,245	)	$	—		$	—		$	(1,245	)
Cash flow interest rate swaps	—			(86,052		)	—			(86,052		)
Foreign exchange forward contracts	—			(19,878		)	—			(19,878		)
Credit default swaps—protection purchased	—			(1,335		)	—			(1,335		)
Commodity swaps	—			(637		)	—			(637		)
Foreign exchange options	—			—			(262		)	(262		)
	$	(1,245	)	$	(107,902	)	$	(262	)	$	(109,409	)

The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of March 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands). There were no liabilities measured at fair value on a non-recurring basis:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of March 31, 2012
Corporate loans held for sale(1)	$	—	$	83,715	$	26,825	$	110,540

(1)As of March 31, 2012, total loans held for sale had a carrying value of $297.7 million of which $110.5 million was carried at estimated fair value and the remaining $187.2 million carried at amortized cost. Of the $110.5 million carried at estimated fair value, $83.7 million was classified as Level 2 given that the assets were valued using quoted prices and other observable inputs in an active market. The remaining $26.8 million was classified as Level 3 given that the Company applied unobservable inputs based on the best available information to determine the estimated fair value.

The following table presents information about the Company’s assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2011
Assets:
Securities available-for-sale:
Corporate debt securities	$	—		$	736,010		$	67,233	$	803,243
Common and preferred stock	11,902			1,308			—		13,210
Total securities available-for-sale	11,902			737,318			67,233		816,453
Other securities, at estimated fair value	—			16,893			2,778		19,671
Residential mortgage-backed securities	—			—			86,479		86,479
Total securities	11,902			754,211			156,490		922,603
Corporate loans, at estimated fair value	—			3,176			—		3,176
Equity investments, at estimated fair value	10,498			28,385			150,962		189,845
Total rate of return swaps	—			—			152		152
Foreign exchange options, net	—			—			13,394		13,394
Commodity swaps, net	—			7,371			—		7,371
Common stock warrants	1,066			—			1,266		2,332
Other assets	—			—			567		567
Total	$	23,466		$	793,143		$	322,831	$	1,139,440
Liabilities:
Securities sold, not yet purchased	$	(1,256	)	$	—		$	—	$	(1,256	)
Cash flow interest rate swaps	—			(100,718		)	—		(100,718		)
Foreign exchange forward contracts, net	—			(12,224		)	—		(12,224		)
Credit default swaps—protection sold, net	—			(7,177		)	—		(7,177		)
	$	(1,256	)	$	(120,119	)	$	—	$	(121,375	)

The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands). There were no liabilities measured at fair value on a non-recurring basis:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2011
Loans held for sale(1)	$	—	$	159,120	$	6,698	$	165,818
Private equity investments(2)	—		—		780		780
Total	$	—	$	159,120	$	7,478	$	166,598

(1)As of December 31, 2011, total loans held for sale had a carrying value of $317.3 million of which $165.8 million was carried at estimated fair value and the remaining $151.5 million carried at amortized cost. Of the $165.8 million carried at estimated fair value, $159.1 million was classified as Level 2 given that the assets were valued using quoted prices and other observable inputs in an active market. The remaining $6.7 million was classified as Level 3 given that the Company applied unobservable inputs based on the best available information to determine the estimated fair value.

(2)Represents private equity investments accounted for under the cost method that were classified as Level 3 when the assets were impaired and measured at estimated fair value using unobservable inputs.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the three months ended March 31, 2012 (amounts in thousands):

	Securities Available- For-Sale: Corporate Debt Securities			Other Securities, at Estimated Fair Value			Residential Mortgage- Backed Securities			Corporate Loans, at Estimated Fair Value		Equity Investments, at Estimated Fair Value		Total Rate of Return Swaps		Common Stock Warrants		Foreign Exchange Options, Net			Other Assets
Beginning balance as of January 1, 2012	$	67,233		$	2,778		$	86,479		$	—	$	150,962	$	152	$	1,266	$	13,394		$	567
Total gains or losses (for the period):
Included in earnings(1)	550			(57		)	2,436			1,314		2,388		141		285		(1,240		)	109
Included in other comprehensive income	4,051			—			—			—		—		—		—		—			—
Transfers into Level 3(2)	—			—			—			—		—		—		—		—			—
Transfers out of Level 3(2)	—			—			—			—		—		—		—		—			—
Purchases	—			—			—			8,615		6,151		—		—		—			—
Sales	—			—			—			—		—		—		—		—			—
Settlements	(328		)	—			(1,552		)	—		—		—		—		—
Ending balance as of March 31, 2012	$	71,506		$	2,721		$	87,363		$	9,929	$	159,501	$	293	$	1,551	$	12,154		$	676
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	550		$	(57	)	$	7,798		$	1,314	$	2,388	$	141	$	285	$	(1,240	)	$	109

(1)Amounts are included in net realized and unrealized gain on investments, net realized and unrealized gain on derivatives and foreign exchange or net realized and unrealized gain (loss) on residential mortgage-backed securities, at estimated fair value in the condensed consolidated statements of operations.

(2)There were no transfers between Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivatives, that are measured at fair value and categorized within Level 3 as of March 31, 2012 (dollar amounts in thousands):

	Balance as of March 31, 2012			Valuation Techniques (1)	Unobservable Inputs (2)	Range (Weighted Average) (3)	Impact to Valuation from an Increase in Input (4)
Assets:
Securities available-for-sale: Corporate debt securities	$	71,506		Market comparables	Yield Discount margin Total leverage Illiquidity discount	8%-25% (15%) 600bps-2400bps (1400bps) 1x-6x (3x) 2%-7% (4%)	Decrease Decrease Decrease Decrease
				Discounted cash flows	Weighted average cost of capital	12% (12%)	Decrease
				Broker quotes	Offered quotes	60-103 (84)	Increase
Other securities, at estimated fair value	$	2,721		Market comparables	Yield	11% (11%)	Decrease
Residential mortgage-backed securities	$	87,363		Discounted cash flows	Probability of default Loss severity Constant prepayment rate	0%-32% (11%) 24%-80% (33%) 0%-35% (13%)	Decrease Decrease (5)
Corporate loans, at estimated fair value	$	9,929		Market comparables	Yield Discount margin Illiquidity discount	39% (39%) 3772bps (3772bps) 20% (20%)	Decrease Decrease Decrease
Equity investments, at estimated fair value	$	159,501		Market comparables	LTM EBITDA multiple Forward EBITDA multiple Control premium	7x-14x (10x) 6x-12x (9x) 25% (25%)	Increase Increase Increase
				Discounted cash flows	Weighted average cost of capital Exit multiple LTM EBITDA	8%-15% (11%) 6x-11x (8x)	Decrease Increase
Total rate of return swaps (6)	$	293		—	—	—	—
Common stock warrants	$	1,551		Market comparables	LTM EBITDA multiple Forward EBITDA multiple	6.2x (6.2x) 6.1x (6.1x)	Increase Increase
				Discounted cash flows	Weighted average cost of capital Exit multiple LTM EBITDA	11% (11%) 6.1x (6.1x)	Decrease Increase
Foreign exchange options	$	12,416		Option pricing model	Forward and spot rates	0.02-1.42 (1.36)	(7)
Other assets	$	676		Broker quotes	Offered quotes	0.09-1.80 (0.76)	Increase
Liabilities:
Foreign exchange options	$	(262	)	Option pricing model	Forward and spot rates	0.02 (0.02)	(7)

(1)  For the assets that have more than one valuation technique, the Company may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. Broker quotes obtained for valuation purposes are reviewed by the Company through other valuation techniques. Equity investments, at estimated fair value are assigned a minimum 5% illiquidity discount, with the exception of certain investments related to natural resources.

(2)  The significant unobservable inputs used in the fair value measurement of the Company’s assets and liabilities may include the last twelve months (“LTM”) earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a variety of factors including economic, industry and market trends and developments; market valuations of comparable companies; and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement.

(3) Weighted average amounts are based on the estimated fair values.

(4) Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

(5) Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6) Note that this amount represents the accrued interest on the unsettled unwind of the total rate of return swaps.

(7) The directional change from an increase in forward and spot rates varies and is dependent on the specific option.

The following table presents additional information about assets, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized level 3 inputs to determine fair value, for the three months ended March 31, 2011 (amounts in thousands):

	Securities Available- For-Sale			Residential Mortgage- Backed Securities			Equity Investments, at Estimated Fair Value		Total Rate of Return Swaps		Common Stock Warrants		Foreign Exchange Options, Net		Other Assets
Beginning balance as of January 1, 2011	$	83,097		$	93,929		$	84,932	$	104	$	3,453	$	14,791	$	—
Total gains or losses (realized and unrealized):
Included in earnings(1)	239			(1,660		)	24,462		31		718		1,682		—
Included in other comprehensive income	3,450			—			—		—		—		—		—
Transfers into Level 3(2)	12,986			—			—		—		—		—		—
Purchases	1,816			—			17,424		—		—		—		—
Sales	(1,665		)	—			—		—		—		—		—
Settlements	6,509			(1,900		)	9,723		—		—		—		750
Ending balance as of March 31, 2011	$	106,432		$	90,369		$	136,541	$	135	$	4,171	$	16,473	$	750
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date(1)	$	—		$	5,895		$	24,462	$	—	$	718	$	1,682	$	—

(1)Amounts are included in net realized and unrealized gain on investments, net realized and unrealized gain on derivatives and foreign exchange or net realized and unrealized gain (loss) on residential mortgage-backed securities, at estimated fair value in the condensed consolidated statements of operations.

(2)Certain securities available-for-sale and equity investments, at estimated fair value, were transferred into Level 3 reflecting reduced transparency of prices for these financial instruments as a result of less trading activity. There were no significant transfers out of Level 3 into Level 1 or 2. The Company’s policy is to recognize transfers into and out of Level 3 at the end of the reporting period.

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Accumulated Other Comprehensive Loss

3 Months Ended

Mar. 31, 2012

Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss

Note 8. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (amounts in thousands):

	As of March 31, 2012			As of December 31, 2011
Net unrealized gains on available-for-sale securities	$	79,895		$	62,248
Net unrealized losses on cash flow hedges	(83,275		)	(97,867		)
Accumulated other comprehensive loss	$	(3,380	)	$	(35,619	)

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Segment Reporting (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Reconciliation of operating profit loss from segment to consolidated
Total investment income	$ 137,934	$ 135,330
Net investment income	37,862	79,452
Other income (loss)	78,931	46,436
Net income	88,048	93,767
Credit
Reconciliation of operating profit loss from segment to consolidated
Total investment income	126,881	132,424
Net investment income	27,280	76,707
Other income (loss)	74,197	46,720
Net income	92,758	112,282
Other
Reconciliation of operating profit loss from segment to consolidated
Total investment income	11,053	2,906
Net investment income	10,582	2,745
Other income (loss)	4,734	(284)
Net income	6,497	(142)
Reconciling Items
Reconciliation of operating profit loss from segment to consolidated
Net income	$ (11,207)	$ (18,373)

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Borrowings

3 Months Ended

Mar. 31, 2012

Borrowings

Borrowings

Note 6. Borrowings

Certain information with respect to the Company’s borrowings as of March 31, 2012 is summarized in the following table (dollar amounts in thousands):

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Fair Value of Collateral(1)
CLO 2005-1 senior secured notes	$	697,551	0.89	%	1,852	$	681,388
CLO 2005-2 senior secured notes	700,159		0.81		2,066	763,051
CLO 2006-1 senior secured notes	683,265		0.86		2,338	866,266
CLO 2007-1 senior secured notes	2,075,040		1.05		3,332	2,328,919
CLO 2007-1 junior secured notes(2)	111,476		—		3,332	125,115
CLO 2007-A senior secured notes	786,763		1.53		2,024	846,882
CLO 2007-A junior secured notes(3)	10,821		—		2,024	11,648
CLO 2011-1 senior debt	431,413		1.91		2,328	500,645
Total collateralized loan obligation secured debt	5,496,488					6,123,914
CLO 2007-1 junior secured notes to affiliates(4)	282,403		—		3,332	316,955
CLO 2007-A junior secured notes to affiliates(5)	65,452		—		2,024	70,453
Total collateralized loan obligation junior secured notes to affiliates	347,855					387,408
Senior secured credit facility	—		3.72		763	—
Asset-based borrowing facility(6)	66,800		2.87		1,314	160,350
Total credit facilities	66,800					160,350
7.0% Convertible senior notes	112,036		7.00		106	—
7.5% Convertible senior notes	165,055		7.50		1,751	—
8.375% Senior notes	250,690		8.38		10,821	—
7.500% Senior notes	111,419		7.50		10,946	—
Junior subordinated notes	283,517		5.54		8,987	—
Total borrowings	$	6,833,860				$	6,671,672

(1)Collateral for borrowings consists of corporate loans, securities available-for-sale and equity investments, at estimated fair value.

(2)CLO 2007-1 junior secured notes consist of $105.7 million of mezzanine notes with a weighted average borrowing rate of 3.2% and $5.8 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(3)CLO 2007-A junior secured notes consist of $6.2 million of mezzanine notes with a weighted average borrowing rate of 7.3% and $4.6 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(4)CLO 2007-1 junior secured notes to affiliates consist of $152.1 million of mezzanine notes with a weighted average borrowing rate of 5.7% and $130.3 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(5)CLO 2007-A junior secured notes to affiliates consist of $55.0 million of mezzanine notes with a weighted average borrowing rate of 6.7% and $10.5 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(6)Collateral for borrowings consists of oil and gas assets, presented at carrying value, purchased for an aggregate purchase price of approximately $158.9 million, whereby an immaterial impairment was deemed to exist as of March 31, 2012. These oil and gas assets are included in other assets in the condensed consolidated balance sheets at carrying amount of $160.4 million.

Certain information with respect to the Company’s borrowings as of December 31, 2011 is summarized in the following table (dollar amounts in thousands):

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Fair Value of Collateral(1)
CLO 2005-1 senior secured notes	$	715,354	0.75	%	1,943	$	798,876
CLO 2005-2 senior secured notes	745,226		0.83		2,157	870,712
CLO 2006-1 senior secured notes	683,265		0.87		2,429	884,873
CLO 2007-1 senior secured notes	2,075,040		1.01		3,423	2,343,420
CLO 2007-1 junior secured notes(2)	61,491		—		3,423	69,444
CLO 2007-A senior secured notes	812,318		1.36		2,115	900,660
CLO 2007-A junior secured notes(3)	10,821		—		2,115	11,997
CLO 2011-1 senior debt	436,522		1.77		2,419	557,389
Total collateralized loan obligation secured debt	5,540,037					6,437,371
CLO 2007-1 junior secured notes to affiliates(4)	300,396		—		3,423	337,407
CLO 2007-A junior secured notes to affiliates(5)	65,452		—		2,115	72,570
Total collateralized loan obligation junior secured notes to affiliates	365,848					409,977
Senior secured credit facility	—		3.83		854	—
Asset-based borrowing facility(6)	38,300		2.53		1,405	86,874
Total credit facilities	38,300					86,874
7.0% Convertible senior notes	135,086		7.00		197	—
7.5% Convertible senior notes	164,744		7.50		1,842	—
8.375% Senior notes	250,676		8.38		10,912	—
Junior subordinated notes	283,517		5.48		9,078	—
Total borrowings	$	6,778,208				$	6,934,222

(1)Collateral for borrowings consists of corporate loans, securities available-for-sale and equity investments, at estimated fair value.

(2)CLO 2007-1 junior secured notes consist of $55.7 million of mezzanine notes with a weighted average borrowing rate of 3.7% and $5.8 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(3)CLO 2007-A junior secured notes consist of $6.2 million of mezzanine notes with a weighted average borrowing rate of 7.1% and $4.6 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(4)CLO 2007-1 junior secured notes to affiliates consist of $170.1 million of mezzanine notes with a weighted average borrowing rate of 5.3% and $130.3 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(5)CLO 2007-A junior secured notes to affiliates consist of $55.0 million of mezzanine notes with a weighted average borrowing rate of 6.6% and $10.5 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(6)Collateral for borrowings consists of oil and gas assets, presented at carrying value, purchased for an aggregate purchase price of approximately $89.1 million, whereby no impairment was deemed to exist. These oil and gas assets are included in other assets in the condensed consolidated balance sheets at carrying amount of $86.9 million.

CLO Debt

The indentures governing the Company’s CLO transactions stipulate the reinvestment period during which the collateral manager, which is an affiliate of the Company’s Manager, can generally sell or buy assets at its discretion and can reinvest principal proceeds into new assets. CLO 2007-A ended its reinvestment period during the fourth quarter of 2010 and both CLO 2005-1 and CLO 2005-2 ended their reinvestment periods in the second quarter of 2011. As a result, principal proceeds from the assets held in each of these transactions are generally used to amortize the outstanding balance of senior notes outstanding. During the three months ended March 31, 2012, $88.8 million of original CLO 2007-A, CLO 2005-1 and CLO 2005-2 senior notes were repaid. CLO 2006-1 and CLO 2007-1 will end their respective reinvestment periods during August 2012 and May 2014, respectively. CLO 2011-1 does not have a reinvestment period and all principal proceeds from holdings in CLO 2011-1 will be used to amortize the transaction. During the three months ended March 31, 2012, $5.1 million of original CLO 2011-1 senior notes were repaid. During the three months ended March 31, 2011, $110.4 million of original CLO 2007-A senior notes were repaid.

On March 31, 2011, the Company closed CLO 2011-1, a $400.0 million secured financing transaction secured by the assets held in CLO 2011-1. At closing, the Company entered into a senior loan agreement (the “CLO 2011-1 Agreement”) through which CLO 2011-1 was able to borrow up to $300.0 million through a non-recourse loan secured by the assets held in CLO 2011-1. On July 6, 2011, the Company amended the CLO 2011-1 Agreement to upsize the transaction to $600.0 million, whereby CLO 2011-1 is able to borrow up to an additional $150.0 million, or total of $450.0 million. Under the amended CLO 2011-1 Agreement, the CLO 2011-1 senior loan matures on August 15, 2018 and borrowings under the CLO 2011-1 Agreement bear interest at a rate of the three-month London interbank offered rate (“LIBOR”) plus 1.35%. As of March 31, 2012 and December 31, 2011, the Company had $431.4 million and $436.5 million, respectively, of borrowings outstanding under the CLO 2011-1 Agreement.

During the first quarter of 2012, the Company issued $42.0 million par amount of CLO 2007-1 class D notes for proceeds of $31.9 million.

Credit Facilities

Senior Secured Credit Facility

The Company has available a $250.0 million asset-based revolving credit facility (the “2014 Facility”), maturing on May 3, 2014, that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified financial assets. The 2014 Facility bears interest at a rate equal to LIBOR plus 3.25% per annum and contains customary covenants applicable to the Company, including a restriction from making annual distributions to holders of common shares in excess of 65% of the Company’s estimated annual taxable income calculated in accordance with the 2014 Facility credit agreement.

As of March 31, 2012, the Company had no borrowings outstanding under the 2014 Facility.

Asset-Based Borrowing Facility

On January 31, 2012, the Company entered into an amendment to its credit agreement to further increase its five-year non-recourse, asset-based revolving credit facility (the “2015 Natural Resources Facility”), maturing on November 5, 2015, from $81.1 million to $137.2 million, that is subject to, among other things, the terms of a borrowing base derived from the value of eligible specified oil and gas assets.

The borrowing base is subject to certain caps and concentration limits customary for financings of this type. The Company has the right to prepay loans under the 2015 Natural Resources Facility in whole or in part at any time. Loans under the 2015 Natural Resources Facility bear interest at a rate equal to LIBOR plus a tiered applicable margin ranging from 1.75% to 2.75% per annum. The 2015 Natural Resources Facility contains customary covenants applicable to the Company.

As of March 31, 2012 and December 31, 2011, the Company had $66.8 million and $38.3 million, respectively, of borrowings outstanding under the 2015 Natural Resources Facility. In addition, under the 2015 Natural Resources Facility, the Company had a letter of credit outstanding totaling $1.0 million.

As of March 31, 2012, the Company believes it was in compliance with the covenant requirements for both credit facilities.

Convertible Debt

In 2010, the Company issued $172.5 million of 7.5% convertible senior notes due January 15, 2017 (“7.5% Notes”), resulting in net proceeds of $167.3 million. Holders of the 7.5% Notes may convert their notes at the applicable conversion rate at any time prior to the close of business on the business day immediately preceding the stated maturity date subject to the Company’s right to terminate the conversion rights of the notes. The Company may satisfy its obligation with respect to the 7.5% Notes tendered for conversion by delivering to the holder either cash, common shares, no par value, issued by the Company or a combination thereof. As of March 31, 2012, the conversion rate for each $1,000 principal amount of 7.5% Notes was 135.2005 common shares.

In accordance with accounting for convertible debt instruments that may be settled in cash upon conversion, the Company separately accounted for the liability and equity components to reflect the nonconvertible debt borrowing rate. The Company determined that the equity component of the 7.5% Notes totaled $10.0 million and is included in paid-in-capital on the Company’s condensed consolidated balance sheet as of March 31, 2012. The remaining liability component of $165.1 million, included within convertible senior notes on the Company’s condensed consolidated balance sheet as of March 31, 2012, is comprised of the principal $172.5 million less the unamortized debt discount of $7.4 million. The total debt discount amortization recognized for the three months ended March 31, 2012 was $0.3 million. The debt discount will continue to be amortized at the effective interest rate of 8.6%. For the three months ended March 31, 2012, the total interest expense recognized on the 7.5% Notes was $3.2 million.

During the first quarter of 2012, the Company repurchased $23.1 million par amount of its 7.0% convertible senior notes due July 15, 2012 (the “7.0% Notes”). These transactions resulted in the Company recording a loss of $0.4 million and an immaterial write-off of unamortized debt issuance costs. During 2011, the Company repurchased $45.5 million par amount of its 7.0% Notes, which resulted in the Company recording a loss of $1.7 million and a write-off of $0.1 million of unamortized debt issuance costs. The 7.0% Notes are convertible into the Company’s common shares at a conversion price of $31.00. The conversion rate for each $1,000 principal amount of 7.0% Notes is 32.2581 of the Company’s common shares.

Senior Notes

On March 20, 2012, the Company issued $115.0 million par amount of 7.500% senior notes due March 20, 2042 (“7.500% Senior Notes”), resulting in net proceeds of $111.4 million. The 7.500% Senior Notes bear interest at a rate of 7.500% per year on the principal amount, accruing from March 20, 2012. Interest is payable quarterly in arrears on June 20, September 20, December 20 and March 20 of each year, beginning on June 20, 2012.

On November 15, 2011, the Company issued $258.8 million par amount of 8.375% senior notes due November 15, 2041 (“8.375% Senior Notes”), resulting in net proceeds of $250.7 million. Interest on the 8.375% Senior Notes is paid quarterly in arrears on February 15, May 15, August 15 and November 15 of each year.

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Derivative Financial Instruments

3 Months Ended

Mar. 31, 2012

Derivative Financial Instruments

Derivative Financial Instruments

Note 7. Derivative Financial Instruments

The Company enters into derivative transactions in order to hedge certain risks related to changes in interest rates, foreign currency exchange rates and commodity prices. Additionally, the Company enters into derivative transactions in the course of its portfolio management activities. The counterparties to the Company’s derivative agreements are major financial institutions with which the Company and its affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, the Company is potentially exposed to losses. The counterparties to the Company’s derivative agreements have investment grade ratings and, as a result, the Company does not anticipate that any of the counterparties will fail to fulfill their obligations.

The table below summarizes the aggregate notional amount and estimated net fair value of the derivative instruments as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	As of March 31, 2012						As of December 31, 2011
	Notional			Estimated Fair Value			Notional			Estimated Fair Value
Cash Flow Hedges:
Interest rate swaps	$	508,333		$	(86,052	)	$	508,333		$	(100,718	)
Free-Standing Derivatives:
Commodity swaps	—			11,167			—			7,371
Credit default swaps—protection sold	13,500			116			33,500			(7,177		)
Credit default swaps—protection purchased	(51,476		)	345			—			—
Total rate of return swaps	—			293			—			152
Foreign exchange forward contracts	(238,294		)	(18,147		)	(234,524		)	(12,224		)
Foreign exchange options	130,207			12,155			130,207			13,394
Common stock warrants	—			3,068			—			2,332
Total	$	362,270		$	(77,055	)	$	437,516		$	(96,870	)

Cash Flow Hedges

The Company uses interest rate derivatives consisting of swaps to hedge a portion of the interest rate risk associated with its borrowings under CLO senior secured notes as well as certain of its floating rate junior subordinated notes. The Company designates these financial instruments as cash flow hedges. Changes in value of the interest rate swap are recorded through other comprehensive income, with gains or losses representing hedge ineffectiveness, if any, recognized in earnings during the reporting period.

In September 2011, the Company entered into a $25.0 million notional pay-fixed, receive-variable interest rate swap. The swap has been designated as a cash flow hedge, the objective of which is to eliminate the variability of cash flows in the interest payments of the Company’s floating rate junior subordinated notes due to fluctuations in the indexed rate. The hedged transaction period is through July 2037, which is the stated maturity of the floating rate debt. As of March 31, 2012, the total interest rate swaps used to hedge a portion of the interest rate risk associated with the Company’s floating rate junior subordinated notes was $125.0 million.

The following table shows the net gains recognized in other comprehensive income related to derivatives in cash flow hedging relationships for the three months ended March 31, 2012 and 2011 (amounts in thousands):

	Three months ended March 31, 2012		Three months endedMarch 31, 2011
Gains recognized in other comprehensive income on cash flow hedges	$	14,592	$	8,192

For all hedges where hedge accounting is being applied, effectiveness testing and other procedures to ensure the ongoing validity of the hedges are performed at least quarterly. During the three months ended March 31, 2012 and 2011, the Company recognized an immaterial amount of ineffectiveness in income on the condensed consolidated statements of operations from its cash flow hedges.

Free-Standing Derivatives

Free-standing derivatives are derivatives that the Company has entered into in conjunction with its investment and risk management activities, but for which the Company has not designated the derivative contract as a hedging instrument for accounting purposes. Such derivative contracts may include credit default swaps (“CDS”), foreign exchange contracts and options, interest rate swaps and commodity derivatives. Free-standing derivatives also include investment financing arrangements (total rate of return swaps) whereby the Company receives the sum of all interest, fees and any positive change in fair value amounts from a reference asset with a specified notional amount and pays interest on such notional amount plus any negative change in fair value amounts from such reference asset.

Gains and losses on free-standing derivatives are reported on the condensed consolidated statements of operations in net realized and unrealized gain on derivatives and foreign exchange. Unrealized gains (losses) represent the change in fair value of the derivative instruments and are noncash items.

Credit Default Swaps

A CDS is a contract in which the contract buyer pays, in the case of a short position, or receives, in the case of long position, a periodic premium until the contract expires or a credit event occurs. In return for this premium, the contract seller receives a payment from or makes a payment to the buyer if there is a credit default or other specified credit event with respect to the issuer (also known as the referenced entity) of the underlying credit instrument referenced in the CDS. Typical credit events include bankruptcy, dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations of the referenced entity.

As of March 31, 2012 and December 31, 2011, the Company had sold protection with a notional amount of $13.5 million and $33.5 million, respectively. In addition, as of March 31, 2012 and December 31, 2011, the Company had purchased protection with a notional amount of $51.5 million and zero, respectively. The Company sells or purchases protection to replicate fixed income securities and to complement the spot market when cash securities of the referenced entity of a particular maturity are not available or when the derivative alternative is less expensive compared to other purchasing alternatives. In addition, the Company may purchase protection to hedge economic exposure to declines in value of certain credit positions. The Company purchases its protection from banks and broker dealers, other financial institutions and other counterparties.

Commodity Derivatives

In an effort to minimize the effects of the volatility of oil, natural gas and natural gas liquids prices, the Company will from time to time enter into derivative instruments such as swap contracts to hedge its forecasted commodities sales. The Company does not designate these contracts as cash flow hedges and as such, the changes in fair value of these instruments are recorded in current period earnings.

The Company entered into commodity derivative contracts, consisting of oil, natural gas and certain natural gas liquid products receive fixed, pay-floating swaps for certain years through 2016. Realized gains (losses) represent amounts related to the settlement of derivative instruments, and for commodity derivatives, are aligned with the underlying production. During the three months ended March 31, 2012 and 2011, the Company had a $0.9 million and an immaterial amount of commodity derivatives settlements, which are settled monthly.

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Commitments & Contingencies

3 Months Ended

Mar. 31, 2012

Commitments & Contingencies

Commitments & Contingencies

Note 9. Commitments & Contingencies

Commitments

As part of its strategy of investing in corporate loans, the Company commits to purchase interests in primary market loan syndications, which obligate the Company to acquire a predetermined interest in such loans at a specified price on a to-be-determined settlement date. Consistent with standard industry practices, once the Company has been informed of the amount of its syndication allocation in a particular loan by the syndication agent, the Company bears the risks and benefits of changes in the fair value of the syndicated loan from that date forward. In addition, the Company also commits to purchase corporate loans in the secondary market that similar to the above, the Company bears the risks and benefits of changes in the fair value from the trade date forward. As of March 31, 2012 and December 31, 2011, the Company had committed to purchase corporate loans with aggregate commitments totaling $284.3 million and $97.2 million, respectively. In addition, the Company participates in certain contingent financing arrangements, whereby the Company is committed to provide funding of up to a specific predetermined amount at the discretion of the borrower or has entered into an agreement to acquire interests in certain assets. As of March 31, 2012 and December 31, 2011, the Company had unfunded financing commitments for corporate loans totaling $7.4 million and $8.1 million, respectively. In addition, as of March 31, 2012 and December 31, 2011, the Company had unfunded financing commitments for other assets, including equity investments, at estimated fair value and working and overriding royalty interests in oil and gas properties, totaling approximately $204.7 million and $40.9 million, respectively. The Company did not have any material losses as of March 31, 2012, nor does it expect material losses related to those assets for which it committed to purchase and fund.

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Earnings per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Reconciliation of basic and diluted net income and distributions per common share
Income from continuing operations	$ 88,048	$ 93,767
Less: Dividends and undistributed earnings allocated to participating securities	297	612
Net income applicable to common shareholders	$ 87,751	$ 93,155
Basic:
Basic weighted average shares outstanding (in shares)	177,775,000	177,075,000
Net income per share (in dollars per share)	$ 0.49	$ 0.53
Diluted:
Basic weighted average shares outstanding (in shares)	177,775,000	177,075,000
Dilutive effect of convertible senior notes (in shares)	4,472,000	4,217,000
Diluted weighted average shares outstanding (in dollars per share)	182,247,000	181,292,000
Net income per share (in dollars per share)	$ 0.48	$ 0.51
Dividends
Distributions declared per common share (in dollars per share)	$ 0.26	$ 0.15
Anti-dilutive securities
Anti-dilutive securities excluded from diluted earnings per share calculations (in shares)	1,932,279	1,932,279

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Commitments And Contingencies (Details) (USD $) In Millions, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Commitments
Aggregate commitments to purchase corporate loans	$ 284.3	$ 97.2
Unfunded financing commitments for loans	7.4	8.1
Unfunded financing commitments for other assets	$ 204.7	$ 40.9

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Subsequent Events

3 Months Ended

Mar. 31, 2012

Subsequent Events

Subsequent Events

Note 14. Subsequent Events

On April 24, 2012, the Company’s board of directors declared a cash distribution for the quarter ended March 31, 2012 on the Company’s common shares of $0.18 per share. The distribution is payable on May 22, 2012 to common shareholders of record as of the close of business on May 8, 2012.

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Borrowings (Tables)

3 Months Ended

Mar. 31, 2012

Borrowings

Schedule of Company's borrowings

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Fair Value of Collateral(1)
CLO 2005-1 senior secured notes	$	697,551	0.89	%	1,852	$	681,388
CLO 2005-2 senior secured notes	700,159		0.81		2,066	763,051
CLO 2006-1 senior secured notes	683,265		0.86		2,338	866,266
CLO 2007-1 senior secured notes	2,075,040		1.05		3,332	2,328,919
CLO 2007-1 junior secured notes(2)	111,476		—		3,332	125,115
CLO 2007-A senior secured notes	786,763		1.53		2,024	846,882
CLO 2007-A junior secured notes(3)	10,821		—		2,024	11,648
CLO 2011-1 senior debt	431,413		1.91		2,328	500,645
Total collateralized loan obligation secured debt	5,496,488					6,123,914
CLO 2007-1 junior secured notes to affiliates(4)	282,403		—		3,332	316,955
CLO 2007-A junior secured notes to affiliates(5)	65,452		—		2,024	70,453
Total collateralized loan obligation junior secured notes to affiliates	347,855					387,408
Senior secured credit facility	—		3.72		763	—
Asset-based borrowing facility(6)	66,800		2.87		1,314	160,350
Total credit facilities	66,800					160,350
7.0% Convertible senior notes	112,036		7.00		106	—
7.5% Convertible senior notes	165,055		7.50		1,751	—
8.375% Senior notes	250,690		8.38		10,821	—
7.500% Senior notes	111,419		7.50		10,946	—
Junior subordinated notes	283,517		5.54		8,987	—
Total borrowings	$	6,833,860				$	6,671,672

(1)Collateral for borrowings consists of corporate loans, securities available-for-sale and equity investments, at estimated fair value.

(2)CLO 2007-1 junior secured notes consist of $105.7 million of mezzanine notes with a weighted average borrowing rate of 3.2% and $5.8 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(3)CLO 2007-A junior secured notes consist of $6.2 million of mezzanine notes with a weighted average borrowing rate of 7.3% and $4.6 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(4)CLO 2007-1 junior secured notes to affiliates consist of $152.1 million of mezzanine notes with a weighted average borrowing rate of 5.7% and $130.3 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(5)CLO 2007-A junior secured notes to affiliates consist of $55.0 million of mezzanine notes with a weighted average borrowing rate of 6.7% and $10.5 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(6)Collateral for borrowings consists of oil and gas assets, presented at carrying value, purchased for an aggregate purchase price of approximately $158.9 million, whereby an immaterial impairment was deemed to exist as of March 31, 2012. These oil and gas assets are included in other assets in the condensed consolidated balance sheets at carrying amount of $160.4 million.

	Outstanding Borrowings		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Fair Value of Collateral(1)
CLO 2005-1 senior secured notes	$	715,354	0.75	%	1,943	$	798,876
CLO 2005-2 senior secured notes	745,226		0.83		2,157	870,712
CLO 2006-1 senior secured notes	683,265		0.87		2,429	884,873
CLO 2007-1 senior secured notes	2,075,040		1.01		3,423	2,343,420
CLO 2007-1 junior secured notes(2)	61,491		—		3,423	69,444
CLO 2007-A senior secured notes	812,318		1.36		2,115	900,660
CLO 2007-A junior secured notes(3)	10,821		—		2,115	11,997
CLO 2011-1 senior debt	436,522		1.77		2,419	557,389
Total collateralized loan obligation secured debt	5,540,037					6,437,371
CLO 2007-1 junior secured notes to affiliates(4)	300,396		—		3,423	337,407
CLO 2007-A junior secured notes to affiliates(5)	65,452		—		2,115	72,570
Total collateralized loan obligation junior secured notes to affiliates	365,848					409,977
Senior secured credit facility	—		3.83		854	—
Asset-based borrowing facility(6)	38,300		2.53		1,405	86,874
Total credit facilities	38,300					86,874
7.0% Convertible senior notes	135,086		7.00		197	—
7.5% Convertible senior notes	164,744		7.50		1,842	—
8.375% Senior notes	250,676		8.38		10,912	—
Junior subordinated notes	283,517		5.48		9,078	—
Total borrowings	$	6,778,208				$	6,934,222

(1)Collateral for borrowings consists of corporate loans, securities available-for-sale and equity investments, at estimated fair value.

(2)CLO 2007-1 junior secured notes consist of $55.7 million of mezzanine notes with a weighted average borrowing rate of 3.7% and $5.8 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(3)CLO 2007-A junior secured notes consist of $6.2 million of mezzanine notes with a weighted average borrowing rate of 7.1% and $4.6 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(4)CLO 2007-1 junior secured notes to affiliates consist of $170.1 million of mezzanine notes with a weighted average borrowing rate of 5.3% and $130.3 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-1.

(5)CLO 2007-A junior secured notes to affiliates consist of $55.0 million of mezzanine notes with a weighted average borrowing rate of 6.6% and $10.5 million of subordinated notes that do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from CLO 2007-A.

(6)Collateral for borrowings consists of oil and gas assets, presented at carrying value, purchased for an aggregate purchase price of approximately $89.1 million, whereby no impairment was deemed to exist. These oil and gas assets are included in other assets in the condensed consolidated balance sheets at carrying amount of $86.9 million.

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Derivative Financial Instruments (Details) (USD $)	3 Months Ended			3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011	Dec. 31, 2011	Mar. 31, 2012 Commodity swaps	Mar. 31, 2011 Commodity swaps	Mar. 31, 2012 Cash Flow Hedges: Interest rate swaps	Dec. 31, 2011 Cash Flow Hedges: Interest rate swaps	Mar. 31, 2012 Cash Flow Hedges: Interest rate swaps - change in notional	Sep. 30, 2011 Cash Flow Hedges: Interest rate swaps - change in notional	Mar. 31, 2012 Free-Standing Derivatives: Commodity swaps	Dec. 31, 2011 Free-Standing Derivatives: Commodity swaps	Mar. 31, 2012 Free-Standing Derivatives: Credit default swaps-protection sold	Dec. 31, 2011 Free-Standing Derivatives: Credit default swaps-protection sold	Mar. 31, 2012 Free-Standing Derivatives: Credit default swaps-protection purchased	Mar. 31, 2012 Free-Standing Derivatives: Total rate of return swaps	Dec. 31, 2011 Free-Standing Derivatives: Total rate of return swaps	Mar. 31, 2012 Free-Standing Derivatives: Foreign exchange forward contracts	Dec. 31, 2011 Free-Standing Derivatives: Foreign exchange forward contracts	Mar. 31, 2012 Free-Standing Derivatives: Foreign exchange options	Dec. 31, 2011 Free-Standing Derivatives: Foreign exchange options	Mar. 31, 2012 Free-Standing Derivatives: Common stock warrants	Dec. 31, 2011 Free-Standing Derivatives: Common stock warrants
Net gains recognized in other comprehensive income related to derivatives in cash flow hedging relationships
Gains recognized in other comprehensive income on cash flow hedges	$ 14,592,000	$ 8,192,000
Summary of aggregate notional amount and estimated net fair value of the derivative instruments
Notional amount	362,270,000		437,516,000			508,333,000	508,333,000	125,000,000	25,000,000			13,500,000	33,500,000	(51,476,000)			(238,294,000)	(234,524,000)	130,207,000	130,207,000
Estimated Fair Value	(77,055,000)		(96,870,000)			(86,052,000)	(100,718,000)			11,167,000	7,371,000	116,000	(7,177,000)	345,000	293,000	152,000	(18,147,000)	(12,224,000)	12,155,000	13,394,000	3,068,000	2,332,000
Monthly derivative settlement amount				$ 900,000	$ 900,000

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Corporate Loans and Allowance for Loan Losses (Details 5) (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011	Dec. 31, 2011
Summary of corporate loans
Corporate loans transferred from held for investment to held for sale	$ 46,077,000	$ 582,878,000
Corporate loans transferred from held for sale to held for investment	7,504,000	97,857,000
Charge-offs recorded	2,098,000	22,109,000
Corporate loans held for sale (in dollars)	297,708,000		317,332,000
Net charge for lower of cost or estimated fair value adjustment	(10,401,000)	(1,567,000)
Corporate Loans Held for Investment
Summary of corporate loans
Corporate loans transferred from held for investment to held for sale	46,100,000	582,800,000
Modified amortized cost of corporate loan	457,100,000	540,400,000
Corporate Loans Held for Sale
Summary of corporate loans
Corporate loans transferred from held for sale to held for investment	7,500,000	97,900,000
Charge-offs recorded	2,100,000	22,100,000
Corporate loans held for sale (in dollars)	297,700,000		317,300,000
Net charge for lower of cost or estimated fair value adjustment	297,700,000	869,800,000
Reduction in lower of cost or estimated fair value allowance	10,400,000	1,600,000
Amortized cost of corporate loans in default	$ 27,600,000
Number of issuers in default	1

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Condensed Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Net income	$ 88,048	$ 93,767
Unrealized gains on securities available-for-sale:
Unrealized (losses) gains arising during period	(4,614)	20,240
Reclassification adjustments for gains realized in net income	22,261	(7,336)
Unrealized gains on securities available-for-sale	17,647	12,904
Unrealized gains on cash flow hedges	14,592	8,192
Total other comprehensive income	32,239	21,096
Comprehensive income	$ 120,287	$ 114,863

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Earnings per Share

3 Months Ended

Mar. 31, 2012

Earnings per Share

Earnings per Share

Note 3. Earnings per Share

The following table presents a reconciliation of basic and diluted net income per common share for the three months ended March 31, 2012 and 2011 (amounts in thousands, except per share information), as well as the distributions declared per common share during the quarters ended March 31, 2012 and 2011:

	Three months ended March 31, 2012		Three months ended March 31, 2011
Income from continuing operations	$	88,048	$	93,767
Less: Dividends and undistributed earnings allocated to participating securities	297		612
Net income applicable to common shareholders	$	87,751	$	93,155
Basic:
Basic weighted average shares outstanding	177,775		177,075
Net income per share	$	0.49	$	0.53
Diluted:
Basic weighted average shares outstanding	177,775		177,075
Dilutive effect of convertible senior notes	4,472		4,217
Diluted weighted average shares outstanding(1)	182,247		181,292
Net income per share	$	0.48	$	0.51
Distributions declared per common share	$	0.26	$	0.15

(1)Potential anti-dilutive common shares excluded from diluted earnings per share related to common share options were 1,932,279 for the three months ended March 31, 2012 and 2011.

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Fair Value of Financial Instruments (Details 4) (Foreign exchange options, USD $) In Thousands, unless otherwise specified	Mar. 31, 2012
Foreign exchange options
Valuation techniques used for liabilities, measured at fair value and categarized within level 3
Derivative liability, fair value	$ (262)

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Derivative Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2012

Derivative Financial Instruments

Schedule of aggregate notional amount and estimated net fair value of the derivative instruments

	As of March 31, 2012						As of December 31, 2011
	Notional			Estimated Fair Value			Notional			Estimated Fair Value
Cash Flow Hedges:
Interest rate swaps	$	508,333		$	(86,052	)	$	508,333		$	(100,718	)
Free-Standing Derivatives:
Commodity swaps	—			11,167			—			7,371
Credit default swaps—protection sold	13,500			116			33,500			(7,177		)
Credit default swaps—protection purchased	(51,476		)	345			—			—
Total rate of return swaps	—			293			—			152
Foreign exchange forward contracts	(238,294		)	(18,147		)	(234,524		)	(12,224		)
Foreign exchange options	130,207			12,155			130,207			13,394
Common stock warrants	—			3,068			—			2,332
Total	$	362,270		$	(77,055	)	$	437,516		$	(96,870	)

Schedule of net gains recognized in other comprehensive income related to derivatives in cash flow hedging relationships

	Three months ended March 31, 2012		Three months endedMarch 31, 2011
Gains recognized in other comprehensive income on cash flow hedges	$	14,592	$	8,192

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Corporate Loans and Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012 component	Mar. 31, 2011	Dec. 31, 2011
Corporate Loans and Allowance for Loan Losses
Number of components in the loans receivable allowance for loan losses	2
Changes in allowance for loan losses:
Beginning balance	$ 191,407	$ 209,030
Provision for loan losses	46,498	11,661
Charge-offs	(2,098)	(22,109)
Ending balance	235,807	198,582
Allowance for loan losses by basis of impairment method:
Ending balance: individually evaluated for impairment	235,807		191,407
Allowance for loan losses	235,807	198,582
Corporate loans (recorded investment) by basis of impairment method:
Ending balance: individually evaluated for impairment	5,917,667		6,334,232
Recorded Investment, Allocated	$ 5,917,667		$ 6,334,232

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Segment Reporting

3 Months Ended

Mar. 31, 2012

Segment Reporting

Segment Reporting

Note 13. Segment Reporting

Operating segments are defined as components of a company in which separate financial information is available and reviewed by the chief operating decision maker or group in determining how to allocate resources and assessing performance. The Company operates its business through multiple reportable business segments, which it has determined to be credit (“Credit”) and all other segments (“Other”). The Company’s segments are differentiated primarily by their investment focuses. The Credit segment includes primarily below investment grade corporate debt comprised of senior secured and unsecured loans, mezzanine loans, high yield bonds, and distressed and stressed debt securities. The Other segments include all other portfolio holdings, including oil and natural gas working interests and overriding royalty interests.

Prior to 2011, the Company operated under a single business segment of Credit. However, during 2011, the Company began purchasing additional working interests and overriding royalty interests in oil and natural gas properties. As of December 31, 2011, the Company determined that it met certain segment reporting requirements and accordingly, began disclosing information by segment based on its acquisition of additional natural resources assets, combined with its belief that other areas of investment focus including natural resources, while currently not material, may become a significant part of its business. The segments currently reported are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by the Company.

The Company evaluates the performance of its segments based on several components including total investment income, net investment income, other income (loss) and net income (loss). Net investment income is the difference between income earned on assets (or total investment income) and the cost of liabilities to fund those assets, as well as the related provision for loan losses, if applicable. Net income (loss) includes (i) net investment income, (ii) other income (loss), which is comprised primarily of unrealized and realized gains and losses on investments and derivatives, and (iii) non-investment expenses. Certain corporate assets and expenses that are not directly related to the individual segments, including base management fees and professional services are allocated to individual segments based on the carrying value of the assets within those segments. Certain other corporate assets and expenses, including prepaid insurance, incentive fees, insurance expenses, directors’ expenses and share-based compensation expense are not allocated to individual segments in the Company’s assessment of segment performance. Collectively, these items are included as reconciling items between reported segment amounts and consolidated totals.

The following table shows data of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements for the three months ended March 31, 2012 and 2011 (amounts in thousands):

For the three months	Credit				Other					Reconciling Items						Consolidated Company
ended March 31,	2012		2011		2012		2011			2012			2011			2012		2011
Total investment income	$	126,881	$	132,424	$	11,053	$	2,906		$	—		$	—		$	137,934	$	135,330
Net investment income	$	27,280	$	76,707	$	10,582	$	2,745		$	—		$	—		$	37,862	$	79,452
Other income (loss)	$	74,197	$	46,720	$	4,734	$	(284	)	$	—		$	—		$	78,931	$	46,436
Net income (loss)	$	92,758	$	112,282	$	6,497	$	(142	)	$	(11,207	)	$	(18,373	)	$	88,048	$	93,767

The following table shows total assets of reportable segments reconciled to amounts reflected in the condensed consolidated financial statements as of March 31, 2012 and December 31, 2011 (amounts in thousands):

	Credit				Other(1)				Reconciling Items				Consolidated Company
As of	March 31,2012		December 31, 2011		March 31,2012		December 31, 2011		March 31, 2012		December 31, 2011		March 31,2012		December  31, 2011
Total assets	$	8,524,160	$	8,487,702	$	247,442	$	158,639	$	588	$	887	$	8,772,190	$	8,647,228

(1)Consists primarily of natural resources assets, which are included in other assets on our condensed consolidated balance sheets.