KKR Financial Delays Repayments, Starts Negotiations (Update5) By Patricia Kuo and Edward Evans Feb. 20 (Bloomberg) -- KKR Financial Holdings LLC, Kohlberg Kravis Roberts & Co.'s publicly traded fixed-income fund, delayed repaying asset-backed commercial paper and started restructuring talks with creditors. The fund, which invests in corporate debt and mortgages, agreed with holders of its residential mortgage-backed securities to defer repayment a second time, KKR Financial said in a regulatory filing yesterday. About half the debt will be due by March 3 instead of Feb. 15, with the rest owed on March 25. KKR didn't provide details of how much debt is affected. The talks come less than six months after the fund received a $230 million cash infusion from investors following losses on residential mortgages in the wake of the U.S. subprime crisis. The fund, led by Chief Executive Officer Saturnino Fanlo, raised a further $270 million in a rights offering with some of KKR's own partners buying shares in it, which had $19 billion of assets at the end of December. ``The picture is getting worse and worse,'' said Felix Freund, who helps manage the equivalent of $14.7 billion of fixed-income securities at Frankfurt-based Union Investment GmbH. KKR's second extension of repayment deadline ``shows there is still a lot of levered investments in the credit market that we can't see,'' he said. Repricing `Driver' The deferral drove investors to seek the security of government debt, sending 10-year Japanese bonds to the biggest gain in two weeks while perceived corporate risk in Asia and Europe soared. Contracts on Europe's Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 26.5 basis points to 611.5 today, according to Deutsche Bank AG. A basis point is 0.01 percentage point. ``The driver behind the current repricing is KKR Financial Holdings delaying repayment of CP for the second time,'' analysts led by Mark Harmer, head of credit research at ING Groep NV, said in a note to clients today. KKR Financial has dropped by more than half in New York trading in the past 12 months, and fell 11 percent to $13 at 8:52 a.m. in New York today. Zoe Watt, a spokeswoman for KKR in London, declined to comment. Kohlberg Kravis Roberts, the New York-based investment firm run by Henry Kravis and George Roberts, raised $800 million in KKR Financial's initial public offering in June 2005, selling the shares for $24 apiece. The fund raised money by selling commercial paper to invest in mortgages. It sold almost half of its mortgage loans in August as prices on bonds linked to U.S. home loans started to drop, leaving it with about $5.3 billion of mortgages. Conduits Both Kravis and Roberts sit on KKR Financial's six-member investment committee, alongside KKR Partner Scott Nuttall, KKR Financial's Fanlo and Chief Operating Officer David Netjes. Kravis and Roberts started the firm with Jerome Kohlberg, their colleague from Bear Stearns Cos., in 1976. Kohlberg left in 1987 and started his own buyout group, Kohlberg & Co. LLC. The private-equity business owns more than 42 companies with more than $180 billion of annual revenue and about 800,000 workers around the world. The firm's investments range from Alliance Boots Ltd. in the U.K. to Texas power producer TXU Corp., now known as Energy Future Holdings Corp. KKR put $38.3 million in October into the two commercial- paper funds run by KKR Financial. The KKR Atlantic Funding Trust and KKR Pacific Funding Trust, once $5 billion conduits rated A- 1+, the top level, were downgraded by ratings company Standard & Poor's to A-2 and A-1 in October. KKR Pacific was cut again to A-3, the lowest investment-grade for short-term debt in February. Cash Injection The terms of investing in both programs were first changed Oct. 15, S&P said, with KKR agreeing to inject cash into the funds and lengthening the maturities to Feb. 15 for half of each program's extendible notes and March 13 for the other half. KKR Financial booked a third-quarter loss of $261.5 million, hurt by a $250 million writedown for the notes. The fund had $1.04 billion of cash available at the end of 2007, according to its earnings report. The company received $500 million in August from investors including Farallon Capital Management LLC and Morgan Stanley. The fund also raised $270 million in a rights offering in September, with almost a fifth of the shares on sale bought by Kohlberg Kravis Roberts partners.