KKR says financing costs increased significantly

KKR Says Financing Costs `Increased Significantly' (Update3)
By Elizabeth Hester and Jason Kelly

Aug. 13 (Bloomberg) -- Kohlberg Kravis Roberts & Co., the private-equity firm that plans to raise $1.25 billion in an initial public offering, said the recent jump in borrowing costs for leveraged buyouts may hurt its funds' performance.

The cost to issue high-risk, high-yield debt has ``recently increased significantly'' and the New York-based firm may need to rely on investment banks to fund transactions, KKR said in a filing with the U.S. Securities and Exchange Commission today. Blackstone Group LP, manager of the world's largest private-equity fund, also cited ``more challenging financing'' when it announced earnings today.
``More costly and restrictive financing may adversely impact the returns of our leveraged-buyout transactions and, therefore, adversely affect our results of operations and financial condition,'' KKR said in its filing.

Investors, wary of risk after the collapse of the subprime-mortgage market, are shunning bonds and loans used to pay for buyouts including KKR's planned takeover of U.K. pharmacy chain Alliance Boots Plc. The extra yield investors demand to own non-investment-grade corporate bonds rather than Treasuries has climbed to 412 basis points from a record-low 241 on June 5, Merrill Lynch & Co. data show. A basis point is one one-hundredth of one percent.

About $330 billion in bonds and loans for announced deals remain unsold, according to an Aug. 8 estimate from Citigroup Inc. analyst Prashant Bhatia.

`Way Too Optimistic'
Private-equity executives and investment bankers are debating how long it will take lenders to sell that debt. Blackstone President Tony James said today that it's unlikely to happen in the near term.

``The sense that people will come back right after Labor Day is way too optimistic,'' James said on a conference call with investors. ``It will take a while to work through these issues.''

Blackstone, based in New York, said today that second- quarter profit more than tripled from a year ago to $774 million and revenue increased to $975 million from $325 million. The earnings report was Blackstone's first since its initial public offering in June.

While the early part of the period was ``fundamentally positive,'' concern over the U.S. housing market and the volume of debt waiting to be financed for LBOs created ``more challenging financing conditions'' that persist, Blackstone said in the statement.

Blackstone's Stock
Blackstone shares gained 1.7 percent to $25.71 in New York Stock Exchange composite trading. Earlier today, they rose as much as 7.8 percent, the most since the company's IPO.

KKR, founded by Henry Kravis and George Roberts, filed July 3 to sell shares of their management company to the public for the first time. Kravis and Roberts won't sell shares, and will use the money raised in the IPO to expand the firm and finance buyouts, the company said. The number of shares and the price weren't disclosed.

Net income for the quarter ended March 31 rose 46 percent to $380.9 million from $260.6 million in the year-earlier period, according to the filing. The company estimated that its buyout funds had $20 billion of investments as of March 31.

KKR paid current owners $318.8 million for the quarter ended March 31 and $1.06 billion in 2006. Before the IPO, the firm plans to make at least one cash distribution to owners of ``substantially all of the cash-on-hand,'' the filing said.

Antitrust Inquiry
KKR also disclosed in the filing that the U.S. Justice Department requested ``certain documents'' from KKR as part of an investigation into whether private-equity firms violated U.S. antitrust laws.

The Justice Department began an informal antitrust inquiry last year into the collaboration among buyout firms in some deals, a person familiar with the matter said last October.

Prosecutors haven't filed charges related to the probe.

Morgan Stanley and Citigroup are managing the KKR offering.